Really? Keynes Was Right?

Nobel Prize Laureate and NY Times OP-Ed Columnist Paul Krugman in his last Thursday's piece Keynes Was Right wrote;

"In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can't create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.

So the real test of Keynesian economics hasn't come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans - and have suffered Depression-level economic slumps, with real G.D.P in both countries down by double digits."

He essentially makes the (intuitively plausible)case that spending cuts during a downturn can only exacerbate a nation's woes... And cites Greece and Ireland as proof...

Now, in my simplistic view of the world, I struggle with Mr. Krugman's assertions... For one, Greece and Ireland need "emergency loans". Greece and Ireland apparently subscribed fully to the Keynesian notion that when a government borrows from its own people and/or others, the deployment of the borrowed capital will provide offsetting stimulus and the wherewithal to later pay back the debt with interest... But, again, Greece and Ireland need "emergency loans"... And what's this about "savage fiscal austerity"? Yes, those who would offer aid to Greece demand that they show real fiscal restraint going forward (how dare they), that if they continue in their profligate ways, bailed-out they ain't... But "savage" is an awfully strong word, and wasn't Greece's austerity budget just passed the other day? Has there indeed been ample time for this "savagery" to cause a "Depression-level economic slump"? Or could it be that Greece is what becomes of a country when [virtually] its entire economy is at the mercy of bureaucrats spending other people's money on other people?

Our Brief New Year Message

Our 2012 objective, as a firm, remains to help our clients keep their heads about them... To maintain proper allocations, consistent with each individual/family's unique circumstances, time horizon and temperament - and to rebalance as needed... To encourage them, as always, to keep the blinders (to short-term volatility) on and maintain their long-term focus... To remind them that the equity portion of their portfolios' advances tend to (historically speaking) come in spurts (of varying lengths), and those who attempt to time the market's ups and downs risk missing the advances, as well as the buying of declines (through rebalancing), and thus risk blowing permanent holes in their long-term results...

As a commentator, my aim is to aggressively promote commonsense reasoning in a world dominated by media hyperbole and political confusion... To illustrate the unseen costs of every proposition - to, in essence, promote the free-market ideology... To take notice of the opportunities that lie ahead and, in the process, help our clients understand the logic behind our specific investment recommendations...

All of us here at PWA are sincerely grateful for the opportunity to work with a most wonderful group of clients... Please never hesitate to call on us at any time during the year (i.e., no need to wait for your semi-annual review date) when we can be of any service, in any manner, whatsoever!!

Wishing you and yours a healthy, happy, and enlightening New Year!!!!

Lessons from 2011 & Cause for Optimism

*If you're prone to earthquakes, never stick a nuclear plant on the beach...

*If you're a ruthless dictator, keep the peasants off the internet...

*Socialism is fiscally unsustainable... As Margaret Thatcher stated in February 1976, "Socialist governments traditionally do make a financial mess. They [socialists] always run out of other people's money. It's quite a characteristic of them." And in the words of Thomas Sowell; "Socialism in general has a record of failure so blatant that only an intellectual could ignore or evade it."

*We (President Obama) justify intervention (Libya) by "a moral imperative to prevent the massacre of citizens." Yet, when the same occurs elsewhere, our actions [in Libya] were inspired by a "unique set of circumstances"...

*Not smart to even suggest trying 9/11 terrorists in civilian courts in, of all places, New York City...

*Never mess with Navy Seals...

*Harold Camping doesn't know, after all, when the world's going to end...

*There's no buying an NBA title...

*The Amazon's current can wash away any Border (as in Amazon.com and Borders bookstores)...

*The banks of the Mississippi contain mother nature about as well as debt ceilings in Washington contain political ambition...

*Standard and Poor's couldn't foretell the disasters of Lehman and AIG, but they'll downgrade a country that prints its own money...

*Gold is no safe haven...

*By and large, pundits, politicians and the populace don't seem to understand that when you buy something, regardless of where it's made, with a U.S. dollar, you're supporting the U.S... Go find a Euro and try to spend it at Starbucks...

*Protesting cronyism is a worthy pursuit... That is until the politics are exposed... The "Occupiers" will never make a serious play at their own party...

*Those who would protest capitalism haven't the slightest clue what they're protesting...

*The last resort for failed socialist states is to privatize state-owned enterprises... Shoulda tried that first...

*Welfare states eventually become states on welfare...

*You can run [for President], but you cannot hide [your past]...

*Anyone who's aware of child abuse and doesn't do everything humanly possible to prevent its reoccurrence deserves prosecution (and should do time!!)...

*Payroll tax "holidays" cannot, by definition, produce long-term [positive] economic results... You have to come home [to reality] when your holiday's over, right?

*$trillions, stubbornly stuck, oncorporate cash and in bank excess reserves tell the 2011 story; uncertainty-induced inertia....

*Stocks can stay cheap for extended periods...

*Government intervention into the economy presents headwinds of its own, in that it generally comes laced with stifling new regulations... The current annual cost of regulatory compliance sucks $1.7 trillion annually from businesses... That would be roughly 40 million new jobs... Watch this 2 minute video...

*And lastly, in the words of Yogi Berra; "a nickel ain't worth a dime anymore"...

All that said, bumpy ride notwithstanding, there's cause for optimism going forward... As;

*Emerging nations, with their favorable demographics, have huge infrastructure needs, substantial growth prospects within, and welcome foreign investors...

*Better than 50% of the earnings of the companies comprising the S&P 500 come from abroad (emerging nations in particular)...

*Companies, by and large, are in good fiscal shape...

*Liquidity, interest rates and equity valuations line up nicely going forward...

*Pent-up demand will drive U.S. consumer purchases of autos and homes (ultimately).

*Pent-up demand will drive business investment (including acquisitions)... I.e., all that cash is burning a hole in balance sheets...

*Common-business-sense will [ultimately] outlast common-political-nonsense...

Who pays for the payroll tax holiday?

Market Commentary (audio)

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EU Crisis Update 12/23/11 (video)

The Monthly Statement Part 1

Correction: At the very end I said "added a hundred thousand dollars", meant to say "added a hundred dollars a month"...

A Sure-Fire Strategy (for suckers)

Heard a commercial for Updownstocks.com on the way in this morning... Subscribe to their service and they promise a 90% success rate... Amazing! So I'm thinking I should buy in and follow their strategy on behalf of our clients' portfolios... I mean they wouldn't pay for the radio ads and charge for their service if they weren't 100% confident they'll be right 90% of the time... Right?

Well umm, wait a minute... Why would they pay for the ads and sell their strategy if they were indeed certain it'll work going forward? I mean wouldn't they just make zillions for themselves using their own strategy? Or are they already filthy rich and care deeply for the suffering 99%? But if that were the case, wouldn't they just give it away?

And if everyone bought in, who'd sit on the other side of the trade? I mean if it's time to buy Company A, and everyone knew it, who'd we buy it from? Obviously no Company A shareholders would sell when 90%-right-updownstocks.com says buy... Right?

The moral of today's message; you can't time the market... And even if you could, you'd take your strategy to your grave... And if you buy the sure-fire strategy, you're a sucker...

I.e., remember, every transaction requires two individuals possessing opposing opinions...

Lost in the Woods (2011)

Using the see-the-forest metaphor, we'll first acknowledge that, for virtually all of 2011, we've been mired deeply within the trees; debt ceilings, budget deficits, sovereign debt, payroll tax holidays, Japan tsunami, Middle Eastern/North African uprisings, regulatory expansion, market volatility, commodities inflation, etc...

It's all too easy to get lost in the woods, to lose perspective and self-fulfill some pundit's prophecy for our portfolios... I.e., to panic and sell in the midst of a market decline... To, sometime later, wake up to the painful fact that the devastation we feared, was simply, once again, the market doing its business...

Yes, governments can start fires, but whether the trees ultimately burn is determined entirely by natural forces... Nature will inevitably burn the dry, decaying foliage... If man steps in with a scientifically concocted fertilizer, nature may allow some immediate stimulation, but, where necessary, it will nonetheless cull the forest...

When nations lever themselves up, and promise more than they can deliver, the market (nature), through higher borrowing costs, brings them down... Man may intervene, but ultimately, the market determines the outcome...

Stay Tuned...

December 21, 2011 Market/Economic Report (video)

Dear Mr. Chambers,

Republican presidential hopeful Rick Santorum proposes zero tax on all repatriated corporate cash, as long as it's put into plants and equipment... Nevada Democrat Shelley Berkley proposes a reduced repatriation tax if companies promise to increase U.S. payrolls... Good old NY Democrat Chuck Schumer, along with Andy Stern (former union president), proposes using a low 5% repatriation tax to fund an infrastructure bank...

While all other developed nations allow their corporations to bring home foreign-earned(and taxed) profits, either tax-free or at 2%, without condition, the U.S. policymaker would reduce Washington's cut in exchange for control over how a company would deploy that cash - or - as an opportunity (for he/his union pals) to grow the size of our ever-growing government... In thinking he can coerce job growth, and, most importantly, his own political success, the politician would have you and me believe that government, with its $1.6 trillion budget deficit and its $15 trillion debt would best direct private sector profits... Operative words being "his own political success"...

Here's a pretend letter from congresswoman Aty Pical (she would be your 'atypical' politician) to Cisco Systems CEO John Chambers with a message that would bring foreign-held capital back to the U.S. and [potentially] do wonders for our economy:

Dear Mr. Chambers,

Congratulations on your success abroad. We are proud that you, the CEO of a United States corporation, had the foresight [and freedom] to develop profitable ventures worldwide. Should you see opportunity in the U.S. market going forward, we encourage you to invest, free of repatriation tax, those earnings herein, however you see fit. And we promise to stay out of your way in the process. For all evidence strongly suggests that you are substantially more adept at allocating capital than we here in Washington...

We wish you continued success in the years ahead...

Sincerely,
Rep. Aty Pical

This Week's Quotes

"Keynes himself was famously obsessed with affecting government policy. So he focused his brilliant intellect on the short-run rather than on the long-run; on the seen rather than on the unseen; on the superficial rather than on the foundational; on what is politically expedient today rather than on what is economically sound tomorrow." Don Boudreaux on John Maynard Keynes (the architect of today's public economic policy)...

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." Henry Hazlitt (author of Economics in One Lesson) on how good economists view their craft...

"If there is a shutdown, 800,000 nonessential federal employees will be suspended. You know, maybe that's our budget problem right there. We have 800,000 nonessential federal employees." Jay Leno on the real problem!!

Market Commentary (audio)

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The Washington Flu

Two years ago last August the shingles did a number on my eighth nerve (runs between my brain and my left ear)... Unfortunately (it would seem), a quarter-decade has passed and that nerve just ain't healing - the ear rings constantly...

But, like I said, this would only seem unfortunate... As it turns out, my hellacious bout with the shingles has left me with a barometer; when I get 8 hours sleep, the ringing 'virtually' goes away... When I get 4, my left ear rings like a grammar school fire alarm (imagine the annoyance)... And I suspect it was my formerly-typical 3-4 hours sleep that laid open my immune system to begin with... So what do I do? I (more often) sleep like a normal person... And, from what I've been told, healthy sleep habits lead to greater longevity... So maybe I live longer having suffered the 2009 shingles...

The CEO who suffered the 2008 recession hears a ringing every time a politician proposes tighter regs or higher taxes... He therefore sleeps under a pristine balance sheet laced with enough cash that, were he inspired to put it to work, would surely push GDP, as well as the market, to substantially higher digits... He's simply not willing to venture beyond his safety net while fearing he could catch the Washington flu at any moment...

Bottom line; whether we're talking cash on corporate balance sheets or excess reserves in the banking system, today's money is smart money... It will ultimately be put to work, I assure you, but only when it makes good sense... And I wouldn't have it any other way...

Mike Kelly doing his job (must see video)

Democrat, Republican or Independent, you cannot in good conscience deny that this man makes perfect sense... If he legislates true to his words, Mike Kelly (from a fiscal policy standpoint) exemplifies the policymaker our country so desperately needs... Anyone who would reject the truth in his assumptions is either entirely partisan or intuitively challenged... This gentleman, if he's for real, would get my vote regardless of party affiliation... Pass it on!

http://youtu.be/CEArFmRDtrw

This Week's Quotes

From Joseph Schumpeter (2/8/1883

Light Volume...

The headline reads: "Market down three straight days on light volume." Now you know what “market down” means, but do you know what “light volume” means? In case you don’t, it goes like this: volume = number of shares changing hands. Therefore “light volume” means there’s fewer number of shares changing hands than normal.

Here's a simple example of how volume impacts volatility: Let’s say we get bad news out of Europe, or the U.S., or China, or Capitol Hill, or wherever, and you say “enough’s enough.” You’ve ridden that one share of Apple from $40 to $400, you checked Yahoofinance.com and see it priced at $385 – you’re ready to bail.

So you call me and you say “sell my Apple, I’m goin shoppin.” And I say, “at the market?” And you say “at the market, or wherever I feel like shoppin.” I chuckle and say “I mean do you want me to sell your Apple at the market?” You say “you mean you can’t sell it from your office?” I chuckle and say “I mean are you willing to take whatever you can get for it, or do you insist on a price?”. You say “I want $385”. I say “great.” You say “can you direct deposit?” I say “sure.” You say “when?” I say “when it sells.” You say “huh?” I say “somebody has to be willing to pay $385.” You say “Oh (long pause), okay. But what if nobody’ll pay $385?” I say “then it won’t sell.” You say “get what you can for it.” I say “great.”

So I put in a sell order, at the market, and it fills (sells) at $350. I call you and say “it sold at $350.” You say “geeze! Is that all?” I say “yep. Europe, etc., has buyers skittish at the moment.” You say “hmm, I guess that makes sense.”

Now let’s say you and the sucker (or genius), willing to pay $350, were the only two market participants today. Even though only a single share traded hands (very light volume), the headline reads “Apple plunges 9.1% on European debt fears.” Feels like all hell’s breaking loose, but in reality, there’s no panic – it’s just that, for today, nobody’s in the mood to buy.

Really quick, let’s turn it around. You just figured out your new iPad 2 (you’re a new man/woman), and you want to own the wonderful company that created the instrument of your new passion. So you call me and say “I want to buy a share of Apple.” I say “great. At the market?”. -(let’s skip the “huhs”, etc.)- You, seeing it on Yahoofinance.com at $385, say “sure.” I call you back a bit later and say “you got it for $420.” -(let’s skip all the dialogue)- Why so high? Because the news out of Europe was good, and the sucker (or genius) who owned that share of Apple wasn’t willing to let it go for anything less than $420… Even if you and the seller were the only two in the market, the headline would read “Apple skyrockets 9.1% on European optimism.”

As for this week; the Dow’s off a few hundred points on “light volume”. I.e., no big downside conviction (a few sellers), just nobody feeling like buying (at yesterday’s prices)– I suspect because of news out of Europe.

December 14, 2011 Market/Economic Commentary (video)

Market Commentary (audio)

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Nomomoneyprinting...

The Dow was up triple-digits Tuesday until the news that Germany's Angela Merkel rejected increasing the Eurozone bailout fund... In a blink the market was trading at zilch on the morning...

Then back up a hundred it went because somebody was thinking Bernanke would utter "QE3" in his post-meeting commentary...But nope, he actually said the labor market is showing improvement (oh dear) and made no utterance of a near-term dollar-weakening strategy...

Dang! Germany's screwing everything up because it's demanding fiscal responsibility from its over-bloated, spend/borrow-happy subordinates, and, the Fed's not helping when it doesn't promise momoney...

So what do you get? For the moment you get less government spending, less money printing, cheaper gas and cheaper stocks... All good things if you can think beyond the next five minutes...

Letter to the Editor

A poignant message from Phil:

Hi Marty. Well here goes.......

1. I believe in the free market system.
2. I believe that government has far exceeded its role; must be reduced in size immediately. It will be unfortunate that many people loose their jobs due to it's reduction, but things MUST change. (Both parties)
3. I believe that protectionism via tariffs will ultimately severely damage our fragile economy.
4. It is true that history repeats itself; however sometimes those of us that rationalize the events of the moment, do so without recognizing the eventual impact of our actions. Please understand, I'm as guilty as the next guy, but what is clear to me and as you have stated many times; we're spending more than we're bringing in. It must stop.
5. I do believe that the US economy can live with a deficit, and prosper. However, not to the levels that we have currently permitted.

All that said, we have a broken governmental system (bloated and unable to perform properly) If it were 100 years ago, what would we as citizens do? Well, for one; we didn't consider Welfare as a legitimate occupation and means for earning a living. Secondly; the taxes that the "Citizens" of the United States paid actually were used somewhat wisely. Today there are too many watchdogs. If you're a criminal; go to jail and work your time. If the crime is serious enough, the cost of a bullet is only about .75 cents. If you're a citizen; pay your taxes, if you're not a citizen; get out of Dodge. We give too much aid to other countries (never repaid), should concentrate on our own "Legal Citizens", creating jobs.

If US industry can't find a way to build a widget more efficiently, then build something else. We are our own worst enemies; technology developed in the US, in one form or another, has found its way to work against us. It's logical that if you build a better mouse trap and give the technology to another country, they will improve upon it. Live with it...... we have great minds... build something else.

The math is, indeed, the math...

Econ Prof Don Boudreaux, blogging at Cafehayek.com, sheds commonsense onto this entirely fallacious statement made by the President to Steve Kroft on Sunday's 60 Minutes;

"Steve, the math is the math. You can

Market Commentary (audio)

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Another great month for trade!!

Great news folks... International trade numbers are in, and the U.S. successfully imported $40+ billion more in goods and services than it exported last month... I.e:

*The free-to-do-business-anywhere U.S. consumer (and institutions) continues to find bargains worldwide... Which leaves her with more in her pocket with which to save, invest in her kids' education, spend at local businesses, etc...

*Foreign producers have 40 billion more U.S. dollars with which to invest in U.S. stocks, bonds, real estate, job-creating enterprises, etc...

*U.S. businesses, employing huge numbers of U.S. citizens, continue to profit from the bargains they offer U.S. consumers through their foreign supply chains...

*The U.S. dollar is still a valuable commodity... I.e., foreign producers are so eager to accumulate them that they produce [11.5% of] the goods we need at the lowest possible prices...

Like I keep saying;

Protectionism is a most exploited, pernicious and, sadly, pervasive economic fallacy

The Cost of Coercion

Machinist workers in Seattle cheering after their contract with Boeing was ratified. The current accord expires in nine months. By BLOOMBERG NEWS Published: December 8, 2011

Unions are the backbone of our economy, of our Nation's middle class, right? I mean they protect the common man against fat cat corporations, right?

Let's check it out:

Four union walkouts at Boeing over the past 22 years (that's gotta be almost every new employment contract) have, according to Bloomberg, delayed literally hundreds of deliveries... Of course, as the union is fully aware, Boeing can ill afford another strike at this time...

Boeing therefore signed a four-year contract that will increase production in Seattle (will build a 737 there), guarantee 2% annual pay raises to members, provide a new performance-based incentive program, pay a $5,000 "ratification" bonus this month and avert a strike...

The machinists' union agreed to then drop its complaint with the National Labor Relations Board over a new 787 non-union plant in South Carolina, and its members will pay more for medical benefits...

So Boeing, hamstrung by the union, agrees to build a new jet under sub-financially optimal conditions (would've been cost-effective in South Carolina)... And you say; "who cares if Boeing is forced to put out more when it benefits hard-working Americans?"

Now you gotta ask yourself; who ultimately pays the price? "Boeing" you say... I say "nay"... well, maybe not entirely nay... I guess Boeing could go the way of the auto maker... But it's like anything else, you up the cost of a business's doing business and the cost gets passed onto customers, shareholders and, sadly, in Boeing's case, all those folks in South Carolina (assuming that's where they'd have gone had they their druthers) - the would've-been Boeing employees, the contractors and all the ancillary workers who would've built the new plant, and all the South Carolina businesses/consumers who would've benefited from all that efficiently-produced economic activity....

When the politician and the columnist/nobel-laureate-economist champion union's as the backbone of the American economy, as institutions to be coddled and protected, they never seem to consider the unseen side-effects of coercion... I wonder why?

Fairness or Freedom??

It's been my intent from day one to offer commentary herein that transcends political boundaries... To offer my perspective on markets, economies, investment theory and politics in as objective a manner as my free-market instincts allow... Therefore I risk finding myself at odds with some readers when I suggest that unilateral free trade is in our best interest, when I imply that too large a number of the unemployed are abusing the system, when I criticize a conservative politician, a liberal politician, an "occupier" or, as I have repeatedly of late, find fault in the ideology of a number of Republican candidates... Thus far I've had unsubscribers from both the left and right... Each subtly, or not, accusing me of unfairly promoting their opposition's platform... I suppose if I'm ticking off both sides of the aisle, I'm achieving my objective...

If today's message is the proverbial straw for you, I completely understand. Just shoot me the email and I'll quietly concede your subscription...

"This is a make-or-break moment for the middle class and all those who are fighting to get into the middle class," Says President Obama in Tuesday'sOsawatomie, Kansas speech. "At stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home and secure their retirement."

What the &!#% is he talking about???? I'm sorry if you're a sympathizer... But let's entertain just a little intellectual honesty here... Yes, I understand, the President and his advisors have determined that rich-bashing plays well with the populace, nevertheless, as an American, I am offended!

We damn well do live in a country where working people can do the above? Fact is, the only countries in history where "working" people had not these opportunities have been those ruled by heavy-handed dictators. As for centrally-planned economies, you may think they offer such opportunity, but of course (being the intellectually honest bloke you are) you'll look across the pond and see the ultimate effect of politicians promising the populace that which their budgets can't sustain...

"In the end," the President said, "rebuilding this economy based on fair play, a fair shot and a fair share will require all of us to see the stake we have in each other's success."

Here's how it works folks: You, acting in your best interest, produce a good or service that others benefit from and sell it at a price that makes you a profit... If others can't afford it, you'll have to find a cheaper method of production or profitably produce something else. Your product could very well be your talents offered to your employer... If your talents justify a wage, determined by the payer (your boss), that affords you a home and a retirement account, you're in luck. If not, you'll never starve in America. But if you want that home and pension bad enough - it's not to be handed to you, it's not to be taken from someone else (not in America) - you'll work harder and/or you'll develop better talents... Government intruding on this process can only corrupt it...

"Fairness = A (the politician) deciding what's right for B and C, and taking something for himself along the way"... Milton Friedman

"The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both"... Milton Friedman

This year's federal budget tops $3.8 trillion... Our projected revenue is $2.2 trillion - leaving us in the red by a record $1.6 trillion... Unfathomable!! So how do we fix that? Simple; we have three options: One; cut the budget to match revenue... Two; raise tax rates, halt all new spending initiatives and pray the economy doesn't contract under the weight of higher taxes... Three; leave tax rates as is, or reduce them (per JFK), get out of the way (no new regs) and allow the economy to expand...

Fed Chair Ben Bernanke, on the urgency of addressing budget challenges, stated in January 2007: "The longer we wait, the more severe, the more draconian, the more difficult (think Europe) the objectives are going to be. I think the right time to start was about 10 years ago."

Here's our budget, year-by-year, since 2007...

2007 United States federal budget - $2.8 trillion (submitted 2006 by President Bush)
2008 United States federal budget - $2.9 trillion (submitted 2007 by President Bush)
2009 United States federal budget - $3.1 trillion (submitted 2008 by President Bush)
2010 United States federal budget - $3.6 trillion (submitted 2009 by President Obama)
2011 United States federal budget - $3.8 trillion (submitted 2010 by President Obama)

Apparently Washington wasn't listening...

Market Commentary (audio)

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December 7, 2011 Market/Economic Report (video)

"Still a man hears what he wants to hear and disregards the rest, hmhmhmhmhmhmhmmmmm hmhmhmhmmmm"

Mark Zandi, Moody's Chief Economist, says that extending the payroll tax cut will add .5% to next year's GDP, and extending Unemployment Insurance benefits will add .4%... I.e., almost one full percent of economic growth next year hinges on extending short-term programs... Somehow he knows these things...

So here's how it goes: If the extensions are granted, and we grow by 3% next year, 1/3rd of that growth (and oodles of new jobs) will be the direct result of the wisdom of those who pushed through the extensions...

If, on the other hand, the extensions are not granted, and we grow by 3% next year, our economy will have been held back 1/3rd (and thousands will be left jobless) as a direct result of the actions of those who blocked the extensions...

Your bias will determine whether or not you buy it...

"Still a man hears what he wants to hear and disregards the rest, hmhmhmhmhmhmhm hmhmhmhm" Simon and Garfunkel

Market Commentary (audio)

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Kennedy got it right...

Warren Buffet's gripe goes like this: If a rich guy makes say $2 million (net) this year, of which ordinary income (wages, interest, etc.) amounts to $500k, and the remaining $1.5 million results from sale of stocks, real estate, etc., his effective Federal tax rate would be a mere 19%, as follows:

Capital Gains Tax (15%): $225,000
Ordinary Income Tax (35% top marginal): $146,574

Total Tax: $371,574 (19% effective tax rate)

No one would dispute the fact that Mr. Buffet has been a blessing to the business of America... He has employed capital to the betterment of himself and his fellow man... And being the generous soul he be, he would like to see the tax code changed so that those who have achieved great success (notice I don't characterize them as "fortunate") pay a larger percentage of their income in taxes... He would get his wish if the government would simply end the tax break for capital gains...

Here's how allowing the capital gains tax break to expire (set to on 12/31/2012), assuming no new legislation keeping it [at all] below ordinary income rates, would look for our $2 million earner:

Capital Gains Tax (35%): $525,000
Ordinary Income Tax (35% top marginal): $146,574

Total Tax: $671,574 (34% effective rate)

Or, what if we, as some suggest, compromise and go back to the heydays of President Clinton? Many pundits are quick to remind how well the economy did during the '90s, while tax rates were considerably higher... Here's how the $2 million would've been taxed at the end of Clinton's reign (he did lower the cap gains tax from 28 to 20% by the way):

Capital Gains Tax (20%): $300,000
Ordinary Income Tax (39.6% top marginal): $171,349

Total Tax: $471,349 (24% effective rate)

The question is, was it the booming private sector or income tax rates (higher on all income levels by the way) that created the '90s economy? Dumb question, I know...

There's no debating that we had a great economy in the '90s... Revenue poured in as productivity gains (all the new technology) made companies famously profitable... Tech sector spending/investment (not public sector spending) of course led the way to a balanced budget...

So the question for today is; would we be wise to raise taxes (on any level of income) at this juncture? I.e., would we be better served by supporting the public sector or the private sector?

Here's how John F. Kennedy handled things back when he presided over an economy struggling its way out of recession. His plan, enacted the year he died (1963), preceded "a boom that lasted through the 1960s and into the 1970s"... We don't need leaders committed to bringing both sides together, we simply need leaders committed to commonsense... Were today's left to follow Kennedy's lead, today's right would have no choice but to follow as well...

Highlights of his remarks to the Economic Club of New York on Dec. 15, 1962... (excerpted from an abridged version of his speech featured in November 25th's Investors Business Daily)... I highly recommend you read the full text:

"the most direct and significant kind of federal action aiding economic growth is to make possible an increase in private consumption and investment demand - to cut the fetters holding back private spending.

In the past, this could be done in part by the increased use of credit and monetary tools, but our balance of payments situation today places limits on our use of those tools for expansion.

It could also be done by increasing federal expenditures more rapidly than necessary, but such a course would soon demoralize both the government and our economy... If government is to retain the confidence of the people, it must not spend more than can be justified on grounds of national need or spent with maximum efficiency.

The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system - and this administration pledged itself last summer to an across-the-board, top-to-bottom cut in personal and corporate income taxes to be enacted and become effective in 1963...

In short, to increase demand and lift the economy, the federal government's most useful role is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures...

I am confident that the enactment of the right bill next year will in due course increase our gross national product by several times the amount of taxes actually cut. Profit margins will be improved, and both the incentive to invest and the supply of internal funds for investment will be increased. There will be new interest in taking risks, in increasing productivity, in creating new jobs and new products for long-term economic growth.

It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now... The experience of European countries and Japan has borne this out. This country's own experience with tax reduction in 1954 has borne this out. The reason is that only full employment can balance the budget, and tax reduction can pave the way to that employment. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy that can bring a budget surplus.

Our practical choice is not between a tax-cut deficit and a budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy, or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues and achieve, I believe - and I believe this can be done now - a budget surplus. The first type of deficit is a sign of waste and weakness; the second reflects an investment in the future..."

If you can get it for the same, buy American (video)

I am a passionate proponent of foreign trade... Notice I didn't say "free trade"... Free trade implies two or more countries trading freely with one another... Quite frankly, I'm not concerned when a foreign country tariffs a U.S. product, but it troubles me to no end when we tariff a foreign product; when our policymakers favor a select industry over the U.S. consumer... Not to mention the fact, as I've illustrated here ad nauseum, that tariffs can exact real harm upon their host economy...

That said, I would never discount any American's desire to buy American... It's a personal call... And, per the video below, there are indeed instances where one might even buy USA in large scale without severely hitting one's bottom line...

The cost of constructing the featured home in Diane Sawyer's report, using only U.S. made materials, was a mere 1% more than it would have been using the standard array of foreign made materials... Now of course, in most cases, 1% on the cost of a home is at least a couple grand (that someone will eat), but nonetheless, to many that would be a price worth paying to support American industry... And I totally sympathize....

The one caveat that I don't believe I've ever seen addressed in expos

Good Grief! Where Are All The Jobs? (originally posted Oct 2009)

It

Market Commentary (audio)

Click here for today's commentary...

November 30, 2011 Market/Economic Report (video)

Temporary measures beget temporary (election aiding) results...

The great political debate of late is over whether or not to extend the current payroll tax cut that cuts into the social security trust fund... The proponents cite Barclays Bank Economists who say if it's allowed to expire we're looking at a 1+% hit to next year's GDP... The opponents say it hasn't produced squat thus far and blows another $300 billion hole in the budget - and that the proposed offsetting permanent tax-hike on high-earners will result in a net long-term hit to the economy...

Milton Friedman's Permanent Income Hypothesis suggests that the opponents would have it right.... Its central idea being that people base consumption on what they consider their "normal" income. I.e., they maintain a fairly constant standard of living even when their incomes vary from month to month or from year to year. Therefore temporary increases in income would have minimal effect on their spending...

While I'm a huge fan and ardent student of the late Mr. Friedman, his hypothesis is, to me, unconvincing... My experience (with clients) has been that long-term allocations of income (mortgages, retirement savings, etc.) tend to be based on "normal" income... And that consumption spending (other than on essentials, i.e., discretionary) is based on discretionary income... Therefore, when an individual realizes a temporary increase above "normal" income, he/she is every bit as (if not more) likely to spend it as he/she is to save it...

Now, to the payroll-tax-cut-opponent's point; I entirely agree that, at this juncture, it hasn't worked... But I wonder if that hasn't been simply the result of fear (inspiring people to save the extra, or pay down debt). And that, in a period of greater consumer confidence (that survey having improved of late), the consumer wouldn't indeed spend every dime (record-setting Black Friday) of that temporary pick up in income...

I'm afraid the opponents, this time around, may be barking up the wrong tree... Simply stating that it hasn't worked thus far, and therefore won't this time, is very likely to bite their credibility come this time next year...

They would be wiser to focus on the strikingly obvious problem with "temporary" tax cuts - the fact that they're temporary... Think about it; how can we expect anything but temporary (election-aiding) results from a temporary tax cut? And how can we expect anything but a weaker economy and larger deficits (more gov't spending) from a permanent tax increase on any consumer/producer, regardless of his/her level of income?

And I don't care what side of the aisle you lean to; if you don't work for the government (politicians [especially] included), if you're not on [or do not enjoy being on] welfare or unemployment, or if you believe that giving a man the opportunity to fish is better than giving him a fish, you cannot, with a straight face, argue that capital is better allocated by bureaucrats than it is the private sector...

As for the pending vote; look for the Republican Congress, those supposed fiscal champions, knowing it's a fundamentally bad idea for the country, to go right along with the payroll tax cut extension anyway... I'm guessing it would be too politically risky for the dubbed "Party of No" to do the right thing... In the end, they're all just a bunch of politicians...