Monday, December 31, 2012

A microscopic pimple, the politically unthinkable, and Styx...

As I type it appears that a tax deal has been struck (pending the formalities). Yes, there are details, and no, none of them will have any measurable direct effect on your finances during the course of 2013. Which begs the question, what was accomplished? How, if none of the details measurably effects anybody's finances, are we addressing our ever-mounting national debt? Answer, we're not.

Not to pour cold water all over a 160+ point rally in the Dow, but we figured a deal, any deal, would be greeted warmly by traders. As it should've been. For what the market---and the economy for that matter---thirsts for is clarity. Many a CEO has been on the record of late stating "if you're going to raise our taxes, raise them. Just tell us what to expect so we can get back to business." And if raising what essentially amounts to a microscopic pimple on the butt of debt and unfunded liabilities too gargantuan and politically unthinkable to tackle supplies a little clarity, that, by itself, is a good thing.

Ah but what about government spending? What about addressing what any thinking individual who balances a checkbook knows to be the fundamental problem? Well, that's supposed to be next. But, alas, that's politically unthinkable as well. Make no mistake, they'll politic their way through, making some adjustments at the margin---accomplishing virtually nothing that might upset their supporters. In essence, business as usual.

If we're to ultimately grow our way onto a better path---if we're not to become Greece---I assure you, it will have nothing to do with anything transpiring on Capitol Hill over the next few weeks. But rather, it'll be on the backs of creators operating in an environment that allows them to take risks, to fully enjoy the spoils of their successes, and to suffer miserably (loss, not regulation, teaches prudence) when they fail.

For a cheerier look ahead, in case you missed it, read Our View Going Forward.

An excerpt:
The Bottom Line – economically, and societally, speaking:
While there’s plenty in terms of geo-political risk to concern ourselves with at present, the future holds as much promise today as it has at any time in history. Yes, mistakes, particularly mistakes of policy, will be made. And yes, such mistakes will deliver hurdles and setbacks in the years to come. And yet future generations will witness the advancement of the human condition in ways we can’t even begin to imagine. The ultimate pace of that advancement will be determined by the extent to which we possess the freedom to pursue our individual objectives, and the freedom to conduct business in the global marketplace going forward.

In essence, the future---all the politicking notwithstanding---looks quite bright to me...


Sunday, December 30, 2012

Safe to expect a messy market if no deal. Yet, not an event for the long-term investor...

Just caught a news flash that the Republicans are insisting that any overnight "fiscal cliff" deal include changing the calculation---switching to the "Chained Consumer Price Index"--- for social security cost of living increases. Which would result in lower annual adjustments for inflation. This is being billed as a "major setback". Although I recall, just a week or so ago, that the President was amenable to the idea.

If "major setback" in this eleventh hour means we fall off the "cliff", expect a messy stock market for the next few days. Then, very early in the new year, expect the politicians to quickly claw their way back up the cliff with an agreement to keep the Bush-era tax rates alive for folks earning less than $250,000 (or $400,000 per the President's last unofficial offer). The debate over spending cuts, however, is likely to persist right up to the hour Tim Geithner says he can no longer pay the nation's bills. As it stands we hit the debt ceiling limit tomorrow, which gets him juggling the books, which he says he can do for a couple of months. It'll be interesting to see if the Republicans have the political will this time around to stand their ground on spending cuts, as they did during last year's debt-ceiling debate.

There's a potential political benefit for the Republicans by not dealing on taxes until after Tuesday. That way we fall off the cliff, tax rates on every taxpaying American go up, then they can turn around and strike a tax reduction deal. In essence, they can claim credit for cutting tax rates for the middle class, and not raising taxes on upper-income earners (that'll have already happened by itself) if they wait just 48 hours---as opposed to dealing now and getting blamed for agreeing to a tax hike on upper-income earners.

I maintain that the Democrats are in the driver's seat either way. A deal gets done before Tuesday and they take credit for preserving the tax rates on the middle class. No deal now means they take credit for lowering tax rates on the middle class next week.

The political dynamic is that higher taxes on upper-income earners will be viewed as a defeat for the Republicans and a victory for the Democrats. But make no mistake, whether it occurs today or this coming Friday (or some time shortly thereafter), taxpayers earning some number above some number are going to see their tax rates higher than they are today. The deciding factor, in terms of timing, is all about the political ramifications.

Back to the market: As I suggested above, no deal tonight should be greeted none too warmly by traders tomorrow. A deal in January, however, could easily nullify tomorrow's action. In either event, the "fiscal cliff", by itself, is not an event that should in anyway alter your longer-term investment strategy...

I'll keep you posted...

Saturday, December 29, 2012

Today's Quotes

From Thomas Sowell's 2010 edition of Applied Economics:
While politicians can be expected to pay far more attention to political decisions than the average voter will, the nature of that attention is also likely to be different. Elected officials’ top priority is usually getting re-elected, and their time horizon seldom extends beyond the next election. Laws and policies that will produce politically beneficial effects before the next election are usually preferred to policies that will produce even better results some time after the next election. Indeed, policies that will produce good results before the next election may be preferred even if they can be expected to produce bad results afterwards.

And from Frederic Bastiat's 1848 essay Government:
The new Government is no less embarrassed than the former one, for it soon finds that it is much more easy to promise than to perform. It tries to gain time, for this is necessary for maturing its vast projects. At first, it makes a few timid attempts. On one hand it institutes a little elementary instruction; on the other, it makes a little reduction in some taxes. But the contradiction is forever starting up before it; if it would be philanthropic, it must attend to its exchequer; if it neglects its exchequer, it must abstain from being philanthropic.

These two promises are for ever clashing with each other; it cannot be otherwise. To live upon credit, which is the same as exhausting the future, is certainly a present means of reconciling them: an attempt is made to do a little good now, at the expense of a great deal of harm in future.

Today's economist speaks of today's political reality; "policies that will produce good results before the next election may be preferred even if they can be expected to produce bad results afterwards." Which is the same reality Bastiat spoke of 164 years ago; "an attempt is made to do a little good now, at the expense of a great deal of harm in the future."

Thus, the "fiscal cliff" resolution will be little more than a kicking of cans past the next election. The good news is, life in these United States---164 years of political reality notwithstanding---ain't all that bad...


Friday, December 28, 2012

Political chicken...

Yesterday, senators Harry Reid and Mitch McConnell made their speeches. Reid "can't imagine their (the Republican congress) consciences". McConnell reports telling the President that "this is a conversation we should have had months ago". Implying that the President's aloofness is to blame for this dancing on the edge of the "fiscal cliff". Essentially they each spent their floor time chastising the opposing party.

If you lean left, Reid's right on the money. If you lean right, McConnell's simply stating the facts. If you understand that the actors who sit on both sides of the aisle are, first and foremost, concerned with the political ramifications of this fix they've gotten themselves into, you realize that what we're witnessing is nothing more than a game of political chicken. And in the game of chicken, the flinching generally comes a second or two before the would've-been collision. Hence, here we are on December 28th.

If you haven't come to this realization (what truly motivates politicians), then you sincerely believe that these men and women who we've deposited onto Washington---the ones who sit on the side you lean to, that is---have the character and fortitude to put the nation's best interest ahead of their own. Hmm...

Now think about it. Think about running for office. Think about what it would take to get yourself elected to the Senate. For starters it would take some serious money to fund your campaign. So you'll be fundraising. And who would offer up the cash necessary to promote your ambition? John Dillinger said he robbed banks "because that's where the money is". Now if being a bank robber was a requisite for holding public office, a bank robber your man would be. But since illegally stealing other people's money lands one in a U.S. penitentiary, as opposed to the U.S. Senate, he had to resort to less extreme measures, like asking bank and other industries' executives---and other interested parties with money---for donations in return for promises to legally steal taxpayer money (to subsidize his supporters' aims) once in office.

Let's say that you're a different sort of candidate, you're honest. And that you're an advocate for limited government, a free-market ideologue. You understand that government subsidies are nothing more than methods of redistributing taxpayer money to politically favored industries. So you vow to put an end to corporate welfare. Now how much money do you suspect you'll raise from CEOs? You got it, zip!

Ah but then the general public, $25 at a time, will fund your campaign. Well, the thing is, you recognize that social security, medicare and medicaid present unfunded liabilities to the tune of some $85 trillion, and, therefore, serious reform---which you vow to undertake---is needed. And you understand that being unemployed, while still no picnic, is less painful today than it's ever been. And, therefore, knowing that you get what you pay for (that is, extend unemployment benefits and you extend unemployment) you'll push for the ending of unemployment benefit extensions. And you feel the welfare system is doing little more than perpetuating its own existence. Now how much do you suspect, at twenty-five bucks a pop, you'll raise from the general public? You got it, zip!

Ah but you're a gazillionaire. You can fund your own campaign---you don't need to kowtow to any special interest. Okay, but remember, you can't simply buy your way into office---somebody's got to vote for you.

So here's the thing: Your man in office got there by making all the right promises to all the right people. Promises that public policy would be tilted in his supporters' favor. Like it or not, that's the path to public office. And that my friends is the single reason we are where we are. Our "leaders" are weighing the political ramifications of the short-term economic ramifications of whatever they'll ultimately sign on to. As for potential long-term ramifications, well, they're hoping those will land on someone else's watch.

Wednesday, December 26, 2012


I received this text last evening from a friend; "your buddy Krugman is insane, keep destroying him"---I imagine he just read the Princeton professor's latest NY Times Op-Ed. As much as I'd like to accommodate my friend, I kind of promised myself recently that I'd lay off Krugman for awhile. Frankly, it's gotten rather boring. And I hate to be so condescending, but I find it pitiful that a Nobel laureate economist has reduced himself to the rank of the most predictable of partisan hacks. He makes your fanatical right-wing talk show host seem almost bipartisan. And besides, I've given the guy much too much attention on my blog---when I search "Krugman" twenty-one articles (all since November 2011) pop up.

So I'm going try to keep my promise to myself and take a bit of a hiatus from the good professor. That is after leaving you with this commonsensical excerpt from my upcoming daily devotional:

DAY 19: A Bloat of a Different Color

If I told you you’re spending 70 percent more than your annual income, you tell me: Will you be richer or poorer a year from now?

What if I told you you’re currently netting, on average, 250 calories per meal more than you’re burning off daily? You tell me: Would you be fatter or skinnier a year from now?

If you arrange your daily activities so as to net minimal physical stress, you tell me: Will your bones and muscles be more or less dense, and will they possess more or less capacity a year from now?

What would you say if I told you that you could lose weight by increasing your caloric intake by 70 percent daily? And what if I told you that you could become physically stronger while exerting even less over the next twelve months? As much as you’d love to believe me, you’d tell me I’m full of it.

But what if I were the recipient of the Nobel Prize in nutrition (were there such a thing)? Would you believe me then? Sadly, some of you (those who’d do just about anything not to diet or exercise) would. But alas, my academic prowess notwithstanding, my saying it wouldn’t amount to a hill-a-pork-n-beans twelve months from now.

Now what if I told you that you’re spending 70 percent more than your annual income? You tell me: Will you be richer or poorer a year from now? And what would you say if I told you that you’d be in better fiscal shape if you spent even more over the next twelve months? I’d be full of it, right?

But what if you were a company? Still full of it. Ah, but what if you were a nation? Now there’s a bloat of an entirely different color. For at least one Nobel Prize–winning economist, many other not-Nobel-laureate economists, and oodles of pandering politicians would have you believe that very thing. The question is, do you?

Our view going forward...

I'm not one for making economic or financial-market predictions. There are far too many variables at play for any human being to even begin to accurately predict the future---even (if not especially) the economist with the most complex and tested models. And any investment advisor who would claim predictive talent is either profoundly foolish, or an outright charlatan. Personally, I'm more humble today than I was when I began my career 28 years ago. That said, I will herein make a few "assumptions" that I deem actionable for the disciplined long-term investor.

Note: The following references to sector and international equity allocations are directed only to that portion of your portfolio targeted to equities. For example; where I say 4% to 10% emerging markets, that would be 4% to 10% of just your equity exposure. I.e., if your target to stocks is 50% of your portfolio, your overall emerging markets exposure would be 2% to 5%.

Starting with the obvious:
Equity market volatility, as it always has, will present significant opportunity for investors who employ strategic asset allocation in the years ahead. That would be the simple process of targeting an asset mix between equity and fixed income assets and rebalancing to that mix at set intervals. For example; say global equity markets suffer 20% across the board declines over the next six months. The portfolio with a 60% target to equities would become substantially under-weight stocks. Thus, when it's time to rebalance, the investor will be selling fixed income securities and buying stocks sufficient to bring the portfolio's equities exposure back to the 60% target---in essence, buying while others are selling (when stock prices are low relative to the previous rebalancing date). If, on the other hand, stocks rally, the portfolio will become over-weighted equities. Thus, the investor would be selling stocks and buying fixed income securities sufficient to bring the portfolio's equities exposure back down to the 60% target---in essence, selling while others are buying (when stock prices are high relative to the previous rebalancing date).

As for sectors:
Consumer staples, healthcare and utilities should outperform cyclical/sensitive sectors---like technology, energy, industrials and financials---during extended periods of great uncertainty. Wise investors will maintain a reasonable allocation to these sectors at all times. Our typical client portfolio presently carries a 25% to 40% (of its equity exposure) allocation to staples and healthcare (heavier weighting to staples). We recommended an increase in staples late-summer 2011---prior to that recommendation our typical portfolio carried roughly a 20% weighting. Provided we gain a little clarity beyond the "fiscal cliff", we expect to recommend a lightening-up, back to 20%ish, in the coming year.

Industries whose prospects tend to rise and fall with the economy---technology, industrials, energy, financials, materials, etc.,---will likely, over the long-run, provide investor returns superior to the economically-defensive sectors, while experiencing larger price swings in both directions. In essence, the charts for the growth sectors, relative to consumer staples, etc., should show higher peaks and deeper valleys as the world economy meanders its way into the future. Our typical client portfolio currently weights cyclical/sensitive stocks 60% to 75% of its overall equity exposure. Provided we gain a little clarity beyond the "fiscal cliff", we expect to recommend a shift back to roughly 80% in these sectors during the coming year.

We see unusual long-term opportunity in non-US economies, particularly emerging markets. During the first quarter of 2012 we recommended a modest move out of developed non-US markets to index funds that track the stocks of companies domiciled in China, Brazil, India, South Korea, Indonesia, Taiwan, Thailand, Malaysia and other emerging nations. The global economic concerns of the past few years have, we believe, offered up an opportunity to buy into those potentially robust economies at extremely attractive valuations. 85% of the world's population lives in emerging markets and, clearly, western ideals have taken root in the psyche of the citizens and leaders of many of these nations. That said, change can be painful, and we caution investors not to over-indulge in direct emerging markets exposure. Our typical client portfolio's equity exposure is weighted 4% to 10% directly to emerging markets.

We believe, geo-politics notwithstanding, long-term opportunities exist in developed-world equities as well. Particularly in companies with substantial reach into the emerging markets. The relatively young, forward-looking, populations in many of the developing economies (the average age of an Indian worker is 26)---with their need/thirst for infrastructure---presents opportunities for multinational companies in the U.S. and other developed nations. Think industrials, materials, technology, agriculture, energy and finance.

Economies are cyclical and, again, geo-politics notwithstanding, given where we've been over the past few years, a continued pick up in the global economy, however gradual---spurred by the allocation of presently idle capital and pent-up demand---is a distinct possibility in the intermediate-term. We do feel strongly however that the present ultra-easy monetary policy of much of the developed world will present longer-term challenges that may impact asset allocation decisions in the years to come. Inflation would be chief among those challenges.

Fixed Income Investing:
At the present pace of asset purchasing, the U.S. Fed's balance sheet will reach $4 trillion by the end of 2013. That's an expansion of $3.2 trillion over the past 4 years. Consequently, bank excess reserves are approaching a record $3 trillion (the Fed buys assets from banks). The net immediate effect of this activity has been to keep interest rates at utterly frightening lows. Frightening in the sense that when, if not before, the Fed can no longer credibly continue this policy, we should expect interest rates to rise. And with trillions in treasuries earning less than zero on a real (inflation-adjusted) basis, we could see the kind of domino exodus from bonds that would force rates substantially higher over a relatively short period of time. They will call it the bursting of the bond bubble. We are, therefore, recommending that investors approach the bond market with extreme caution. Our typical portfolio's fixed income allocation is presently heavily, if not entirely, in cash. Our best advice is to bite your lip and accept little or no real return, for now, on that portion of your portfolio meant to provide a buffer against volatility. A small consolation, for the yield-hungry investor, comes from the fact that many of the companies comprising, in particular, our clients' large cap value allocation have recently increased their dividend payouts---providing more of an income element, from equities, than had previously existed.

The Bottom Line - investment-wise:
The unpredictability of markets, while unnerving to some, forever offers opportunity for the disciplined investor. In fact, long-term investment success is indeed all about discipline. Investment mistakes are typically emotionally-driven. Fear can drive an investor out of equities long before his/her financial plan would have called for. Typically, and ironically, the times of extreme panic have tended to be extreme buying opportunities. Conversely, greed can inspire an investor to overweight---relative to his/her time horizon and tolerance for risk---a given sector, or stocks in general. Typically, and ironically, times of investor euphoria (think tech in the late 90s and real estate in the mid 00s) have tended to be ideal times to rebalance out of equities. 

Maintaining an asset allocation/rebalancing strategy keeps one from succumbing to the herd mentality. And, as we've discovered, following the herd is generally not your recipe for long-term success---think tech in the late 90s (irrational exuberance), the subsequent market bottom in March 2003 (extreme panic), and real estate in the mid 00s (irrational exuberance), and the subsequent market bottom of March 2009 (extreme panic). I suspect the holders of long-dated bonds have yet to learn that painful lesson.

The Bottom Line - economically, and societally, speaking:
While there's plenty in terms of geo-political risk to concern ourselves with at present, the future holds as much promise today as it has at any time in history. Yes, mistakes, particularly mistakes of policy, will be made. And yes, such mistakes will deliver hurdles and setbacks in the years to come. And yet future generations will witness the advancement of the human condition in ways we can't even begin to imagine. The ultimate pace of that advancement will be determined by the extent to which we possess the freedom to pursue our individual objectives, and the freedom to conduct business in the global marketplace going forward.

Near-term, I remain cautious. Long-term---bumpy roads notwithstanding---I remain wildly optimistic. That (long-term wild optimism) said, your portfolio must, at all times, reflect your time horizon and your temperament.

Thursday, December 20, 2012

Light Volume...

Here's a post from last December where I prepare the reader for the potentially exaggerated volatility that can accompany a period of light volume. Also, in case you missed it, be sure to read last night's short commentary on the no-vote on "Plan B".

December 14, 2011

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.

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 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 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.

Wrestling their way to the edge...

Now this is what I'm talking about. I've been warning clients for weeks to expect extreme volatility while policymakers, all playing to their respective supporters, wrestle their way to the edge of the "fiscal cliff". Of course that wrestling match was to be between Democrats and Republicans, not Republicans and Republicans.

Boehner's "Plan B" apparently doesn't pass the sniff-test for the tea-party contingent. The vote planned for this evening was scrapped for lack of support. And stock futures traders responded as you'd expect---as I type Dow futures are off around 200 points. Congress now goes home for Christmas. They'll be straggling back to "work" on the 26th.

As I suggested in yesterday's audio commentary, don't be surprised if January 1 comes and goes without a deal. Do be surprised if January 1 doesn't get revisited retroactively with the conditions of whatever compromise they conjure up in the early days of 2013.

Bottom line, this was to be expected all along. The fact that it's coming this late in the game may mean that what should have been several weeks of volatility gets concentrated over the course of the next few. Underperforming hedge fund and mutual fund managers (and there's a ton of them this year) have got be salivating---as they may get that buying opportunity after all. Of course they're playing a most precarious game. A deal, when you least expect it---particularly following a market decline---can wipe out a buying opportunity in a hurry. Good thing you and I are long-term investor-types and never get rattled by short-term volatility, right?

Stay tuned, or, safer-yet, tune out...

Tuesday, December 18, 2012

Lines drawn on maps are entirely insignificant...

I am forever baffled by how complicated things can seem when subjected to 200 page analyses by thinkers whose academic prowess gives credence to 200 page analyses.

Case in point being NERA Economic Consulting's 200+ page report titled Macroeconomic Impacts of LNG (liquefied natural gas) Exports from the United States. I haven't read the report. I probably will at some point, but only because, oddly, I find that sort of thing entertaining.

As a practical matter, applying a modicum of commonsense renders such a report merely entertainment for a few odd blokes like yours truly.

The question being, is it good economics to allow American natural gas producers to sell their commodity on the international market? Well, I don't suspect you'd find a single economist who'd tell you it's bad economics to allow Coca Cola, Intel, Apple, Kraft, Caterpillar, etc., to export their wares onto the international market. Why is natural gas any different? Frankly, it's not.

So there, the previous four sentences save us probably a hundred pages of reading. I'll devote the rest to trying to convince you that, in a free market, we'll benefit from natural gas production whether we produce it here and sell it abroad, or whether it's produced abroad and sold here.

The Earth stores vast supplies of natural gas. And, presuming it can be extracted safely, it can go a very long way toward resolving our present-day issues related to energy. From a purely economic standpoint, when it's extracted on U.S. soil and sold abroad, natural gas producers will see profits, and we'll see employment and economic growth. Our foreign customers' energy costs will decline, which will free up capital with which to invest and spend (domestically and on other imports from around the world, including the U.S.)---in essence creating profits, employment and economic growth in myriad industries within their countries.

If the tables were turned, if the vast reserves were to be found under the soil of say Great Britain---and Great Britain producers were free to sell their commodity on the open market---it would see profit and employment growth concentrated in its energy sector. While the U.S. would benefit from lower cost energy, thus freeing up capital to invest and spend---in essence creating profits, employment and economic growth in myriad U.S industries. And U.S. exporters of other stuff would capture those dollars we spend on foreign-produced stuff. For example: we'd buy gas from Great Britain with U.S. dollars, Great Britain would buy and invest in U.S. stuff---or buy from other nations who want U.S. stuff---with those dollars.

You see folks, in a world of free trade, lines drawn on maps are entirely insignificant.

Of all the issues we presently wrestle with, I can think of none more serious than protectionism. In the case of natural gas, industries that use it---chemicals and fertilizer for example---are lobbying hard to restrict exports. I assure you, there's no legitimate national argument for protecting any industry at the expense of others. Let no politician, labor leader or CEO convince you otherwise...

Saturday, December 15, 2012

Intentions are not results...

Here's Don Boudreaux's timely/timeless "Quotation of the Day". Be sure to click this link to catch his parting comment where he mentions "a state of society that is at best stagnant and dreary". Some would say that aptly describes today's U.S. economy. Perhaps those somes are a bit too glass-half-empty --- I think they are --- but, given present trends, we have reason to be concerned...

Quotation of the Day…



… is from page 167 of the 1955 edition of Stuart Gilbert’s translation of Alexis de Tocqueville’s remarkable 1856 masterpiece The Old Regime and the French Revolution:
By the time their ancient love of freedom reawakened in the hearts of the French, they had already been inoculated with a set of ideas as regards the way the country should be governed that were not merely hard to reconcile with free institutions but practically ruled them out.  They had come to regard the ideal social system as one whose aristocracy consisted exclusively of government officials and in which an all-powerful bureaucracy not only took charge of affairs of State but controlled men’s private lives.  Desirous though they were of being free, they were unwilling to go back on the ideology described above and merely tried to adjust it to that of freedom.

This they proposed to do by combining a strong central administration with a paramount legislative assembly: the bureaucratic system with government by the electorate.  The nation as a whole had sovereign rights, while the individual citizen was kept in the strictest tutelage; the former was expected to display the sagacity and virtues of a free race, the latter to behave like an obedient servant.

Friday, December 14, 2012

Update on the 9.1

The following blog post from September 2011 made me rather unpopular with a number of readers. I did receive a few nods as well, but it's always the ones I rattle who stick in my memory---and I acknowledge, it does smack of insensitivity. The attached video (I pulled from this article on cafehayek) inspired me to risk this one again, and offer you an update (in red) on these real-life stories.

Of course this minute sampling offers no credible reflection of the whole, however, considering the employment opportunities discussed in the video, you have to wonder...

The 9.1 (September 2011)

This Thursday President Obama will address the nation and tell of how the government will tackle our whopping 9.1% unemployment rate. From what I gather, there may be yet another plan to extend benefits in the works.

Rudimentary economic theory teaches that you get what you pay for. In essence, if you pay for unemployment, you get unemployment. Not to suggest that we shouldn’t assist our fellow citizens in need, but I can’t help but wonder (per my observation below) if too large a percentage of recipients aren’t abusing the system.

The problem being, as Milton Friedman pointed out;
When you spend someone else’s money on someone else (which would be every government program) you have no incentive to economize and no incentive for quality…

The 9.1

I personally know of exactly five individuals who have received unemployment benefits over the past year. Here are their true stories:

1. A woman who’s now permanently housewifing, who refers to her unemployment checks as her "Macy’s money"… Well, the benefits ran out, and she decided that Macy's stuff was worth working for. She found a job within days of her last check...

2. The Giants fan my son met at the gym who says “at 2,500/month (had to be his salary while working) it’s not worth going back to work.” He brags of watching his premium MLB channels all day long... All I know is that Nick says he hasn't seen this guy at the gym in months...

3. A young man I play basketball with who works 9 months for the state and takes 3 months unemployment benefit every single year, and “absolutely loves it”… He hasn't been showing up at the court lately. I'm guessing I'll see him when those 3 months roll back around...

4. A guy who claims he could get a job in a heartbeat, who, when he worked, outspokenly resented those who exploited the system, yet now confesses to be loving life as one of the 9.1, with no intent whatsoever to get a job till his benefits expire (if ever)… He was right, employable he was. When his unemployment checks stopped coming he immediately went back to work...

5. A gentleman who accepted benefits just long enough to get his real estate license, who now works full time… He's doing great!

So then, empirical evidence (my study) suggests 80% of the 9.1 are abusing the system. And that unemployment benefits clearly inspire unemployment.

I suspect (hope) this isn’t the norm---that surely the majority are using their unemployment benefits to tide them over as they diligently look for work---or, like #5, learn a new trade. I just can’t prove it.

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Thursday, December 13, 2012

Fiscal idiots...

What is it with the super-rich's infatuation with government?


Bill Gates, Warren Buffett, John Bogle, George Soros and sixteen other uber-rich cats and ex-politicians sent a letter to Congress the other day recommending a 45% death tax on estates exceeding $2 million. 


Forget about the travesty of decimating, yes decimating, the estates of families (farmers, small business owners, etc.) that represent lifetimes, generations even, of prudence and hard work --- families that occupy the class that pays the lion's share of all income taxes year in and year out --- and consider the utterly sickening notion that somehow society would be best off by the taking of those assets, those resources, from the folks who've earned them and handing them to the most fiscally inept cast of characters this country has ever seen. I mean Bill Gates is a bright guy, isn't he?


Yes, the U.S. government is a fiscal train wreck. To sustain its present level of spending, it has to find more revenue. But understand, the politicians knew what government was bringing in while they were ramping up spending --- in the real world that's called fiscal stupidity (a real world entity would have to cut spending). And the mega-rich want to give them more (taken from the private sector) to play with.  Insane! 


Jolly Old Saint Ben...

Nobody but nobody likes a party-pooper. And while the glad-handers who presently occupy the right side of the aisle have been anything but prudent, the American electorate, if you believe the polls, sees them as bad people who would steal away their punchbowl. Not that life in these United States has been much of a party (by United States standards) of late, but, clearly, any actor who'd hint at entitlement reform is viewed as the kind of evil green meanie who'd rain terror onto a peaceful Whoville. Thus, as I suggested yesterday, they'll deal on the fiscal cliff, because being a party-pooping-politician plays rather poorly in the opinions of the voting populace.

Now, talk about your parties; yesterday jolly old Saint Ben (Bernanke) pulled yet another goody from his bag of gifts. More QE --- which is the Fed creating money to buy assets from bankers who'll add the cash to their excess reserves which they deposit at the Fed that pays them .25% interest --- and a promise that they'll keep it up until the unemployment rate drops to 6.5%. And another promise that when it drops to 6.5% they'll keep it up anyway. Yes, I quote Bernanke:
Reaching the thresholds will not immediately trigger a reduction in policy accommodation. No single indicator provides a complete assessment of the state of the labor market.

Kind Mr. Bernanke has not a grinchly (or Volckerly) bone in his body.

My son Nick and I meet once a week to discuss markets, world affairs, managing money, etc. This week we chatted a bit about the European debt debacle, how a nation can print, spend and regulate itself sick, and how it gets fixed. I told him that budget news out of Greece is only good news if its citizens are burning down Athens (as awful as that sounds). That means they're trimming the public sector. 

Truly, prosperity is not something policymakers can wrap up in a bow and hand out to their guests. It comes from economic freedom, creativity and hard work!

"How could it be so? It came without ribbons!... it came without tags!... it came without packages, boxes, or bags!"  --The Grinch


Tuesday, December 11, 2012

It's more than simply naivete...

Anyone who would play this market over the next three weeks is simply playing the personalities. This one's too easy: The Republicans will give on tax rate increases (operative word, rate) on the "wealthy", and the spending-reform can gets kicked yet further down the road. Why am I so certain? Well, we're talking politicians, and the polls say a no-deal deals the most damage to Republicans. Yes, I know, if the economy doesn't deliver --- and the debt continues its (present-pace) expansion --- over the next four years, historians will dub these the dreaded Obama years. But sitting politicians aren't the least bit concerned with the opinions of generations to come --- bottom line; they have their seats to worry about. Therefore, falling off the cliff is a virtual impossibility.

Now, clearly, no semi-reasonable human being, who remains uncaptured by the political process, and/or unafflicted by extreme naiveté, can fathom good things economic coming from running trillion-dollar deficits ad infinitum. So what does that say about today's poll-respondent? Well, naiveté we'll agree on, but if you at all doubt political capture, think about it:

How do union members (auto workers, steel workers, tire workers, teachers, federal employees, nurses, teamsters, electricians, etc., etc., etc.) feel about government spending?
How do attorneys feel about regulations?
How do real estate agents feel about homeowner bailouts?
How do unemployed folks feel about government spending?
How do welfare recipients feel about government spending?
How do life insurance salespersons feel about estate taxes?
How do retired folks feel about social program reform?
How do compliance consultants feel about regulations?
How do accountants feel about tax simplification?

While both parties no doubt find support in the above list (save perhaps for one or two), the two sides nonetheless believe they stand divided on the essentials. I say NOPE! Some want bigger government and aren't ashamed to admit it, the others want the goodies that come from bigger government, whether they admit it or not. Like I said in Chameleons, deficit spending is a bad thing, that is until some of it lands on your doorstep.

And, sadly, at the end of the day, what they believe will ultimately serve their personal ends --- bigger government --- would be their undoing. Greece, Spain, Italy, Portugal, etc. are proof positive...

Sunday, December 9, 2012

Is it charity or economics?

Yesterday's AP article titled End of Jobless Benefit Extension 'the Real Cliff' estimates that 2.1 million people will lose their unemployment benefits this December 29th, and 1 million more during the ensuing 3 months. And that the cost of extending unemployment benefits has been $520 billion since 2008.

I'd say it's a pretty safe bet that we'll see benefits extended yet further under whatever compromise the two sides hammer out --- the Democrats have been vocal on the issue, the Republicans have been mute.

Senator Jack Reed, Democrat from Rhode Island, says "this is the real cliff" and insists that another extension of benefits must be part of any deal. He's concerned with the plight of the unemployed: "Many of these people are struggling to pay mortgages, to provide education for their children."

The Congressional Budget Office says that extending unemployment benefits another year would create 300,000 jobs (oh the certainty). The average benefit of about $300 a week tends to get spent quickly for food, rent and other basic necessities, their report said, stimulating the economy.

So what is it? What inspires the push to extend benefits to the long-term unemployed? Is it charity? Or is it economics?

If it's charity, so be it. We understand that when we provide an unemployed family with money we're providing life's basic needs. We do it because we care, regardless of the cost.

If it's economics --- if it's about growing jobs --- well, that's a whole different proposition altogether. It's no small stretch to accept the notion that by extracting resources from job producers and distributing them to the jobless we somehow create jobs. Essentially, the politician is saying "look job producers, we don't like how you're investing your resources, we want you to start hiring people. So here's what we're going to do; we're going to raise your taxes --- we're going to curtail whatever long-term aspirations you may have had for that capital --- and distribute it in a fashion that will provide short-term economic stimulus to the point where you'll be forced to bring on more workers just to meet the demand for the same old stuff you produce. Of course if the economy were better, we wouldn't have to do it."

In essence, Washington --- the Washington that spends a trillion-plus more than its income --- knows better how to allocate resources than does the private sector.

Clearly, the economic logic rests on very shaky ground.

So then, it has to be charity. But, seriously, wouldn't we better help the unemployed by leaving resources with employers? I mean heaping burdensome regulations, higher taxes, and mandated healthcare onto the producers of employment at a time when we're after more employment seems a bit crazy, don't you think? But of course that begs the question, without raising taxes, how do we extend unemployment benefits? The answer is, we wouldn't have to.

Friday, December 7, 2012

An Outrage!

Here's Paul Krugman in this morning's NY Times:
Influential people in Washington aren’t worried about losing their jobs; by and large they don’t even know anyone who’s unemployed. The plight of the unemployed simply doesn’t loom large in their minds — and, of course, the unemployed don’t hire lobbyists or make big campaign contributions.

So the unemployment crisis goes on and on, even though we have both the knowledge and the means to solve it. It's a vast tragedy --- and it's also an outrage.

True, the unemployed don't hire lobbyists, they don't need to. Keynesian ideology and political aspiration inspire all the lobbying they could ever need. Keynesians are consumptians --- it's all about spending. Therefore (by their way of thinking), if we're to suffer low single-digit economic growth into the far reaches of tomorrow, I suppose unemployment benefits should be treated like QE3 --- no expiration date.

To be fair, Krugman does understand the unseen cost of high unemployment:
When willing workers endure forced idleness society as a whole suffers from the waste of their efforts and talents.

While some forever-aspiring politicians don't:
Let me say that unemployment insurance… is one of the biggest stimuluses (sic) to our economy. Economists will tell you, this money is spent quickly. It injects demand into the economy, and it’s job creating. It creates jobs faster than almost any other initiative you can name. -Nancy Pelosi

Hey, here's an idea; how about we extend unemployment benefits until the unemployment rate drops to some number, like 3%, then back them off to say 26 weeks? And, until we get there, we'll need to build in an inflation factor to make sure we get the all-necessary continual growth in consumption. Besides, subjecting someone to a potential lifetime of demotivation without compensating for inflation would be heartless. And don't sweat the perpetual deficit spending, Krugman already has that one figured out:
Remember, the U.S. government can't run out of cash (it can print the stuff)....

Now that's an outrage!

In the end it's very simple:
If you pay people not to work and tax them when they do, don’t be surprised if you get unemployment. -Milton Friedman

Wednesday, December 5, 2012

Peace of Mind is Priceless... (white board lessons)

In the following "stuff" means your long-term positions in shares of domestic and foreign companies that supply markets around the world.

So what happens to my portfolio if we fall off the fiscal cliff? That's the question of the day for investment professionals like me. My answer; it depends on you.

The stuff you own will either stay in your possession while short-term traders, panic-stricken ex-long-term holders, and long-term opportunists bargain the price of your stuff all over the map--or, you'll become a panic-stricken ex-long-term holder.

And, indeed, there's no shame in becoming the latter. But if that's to be you, you have to make yourself this promise; when the dust settles, when (or if) it occurs to you that regardless of tax rates or regulations, there remains a world of opportunity for smart-run global franchises, you won't beat yourself up. For, at the end of the day, peace of mind is priceless.

Watch these two again, both are very pertinent to today's market:

Today's TV Segment (video)

Sunday, December 2, 2012

Never time the market!

Every Wednesday morning I have the pleasure of appearing on local CBS affiliate Channel 47 in Fresno and reporting on the whys and wherefores of stock market volatility—essentially offering insight into the unknowable.

For example: Tuesday delivered the third largest single-day point decline for the Dow this year, my job Wednesday was to explain it. And while my ego forever conjures up its theories, I---being the humble bloke I be---nonetheless scan the opinions of the world's finest traders, analysts, economists and gurus before presenting the reason du jour to the Central California community. Today, as a result of intense deliberation, I offered up my great revelation, "all of the above". Which would be all of the below:
"Rumor that Bernanke will step-down in 2014."
"Spain's GDP lower than expected."
"Structural downturn heading into a multi-quarter decline".
"It's all about disappointing earnings".
"It's all about guidance".
"Worries over the "Fiscal Cliff"".
"Too much QE".
"Not enough QE".
"Normal profit taking".
"Market following commodities lower".
"Market selling off on dollar rally".
"The S&P bumping against the bottom range of its 100-day moving average".

I mean it has to be all, or at least some, of these, right? I mean it can't be that hard to know, in hindsight, what—on any given day—inspired to action a world of individuals who transact their affairs in pursuit of their own objectives, can it?

In Beware the King(s) (read it to get the full flavor of this message) I picked on Bill Gross for his long-term egobese prognostication, but the same goes for those of us (yes us) who would dare suggest that the reasons for Tuesday can be condensed onto a TV spot, a blog post, or a column in the Wall Street Journal.

And even if, by some magic, you got yesterday---in pro, or retro, spect---right (but how would you know?), don't think for a minute that the same sequence of events would produce the same market reaction on any other day. Who would have thought that on the day (yesterday) Apple, with all its successes, announces its foray into the mini-tablet market, that its stock would drop twenty bucks? The same news on June 1st could easily have shot the share price to an all-time high—at least that's what the excuse would have been.

My point? Never time the market!

Saturday, December 1, 2012

Partisanship is a most blinding affliction...

Paul Krugman is a special kind of economist. Stuff's true simply because he says so. Here he was (Thursday) asserting that the math behind raising revenue by limiting deductions, as opposed to raising rates, simply doesn't work:
Or take a subtler example, the insistence that any revenue increases should come from limiting deductions rather than from higher tax rates. The key thing to realize here is that the math just doesn’t work; there is, in fact, no way limits on deductions can raise as much revenue from the wealthy as you can get simply by letting the relevant parts of the Bush-era tax cuts expire. So any proposal to avoid a rate increase is, whatever its proponents may say, a proposal that we let the 1 percent off the hook and shift the burden, one way or another, to the middle class or the poor.

Now I'd love to see "the math"--because I've been thinking the opposite--but, alas, Krugman makes his assertion without providing the proof. I know, silly me, his word should be proof enough.

Here's what I'm thinking (no math, just real-world commonsense):

If we go with "letting the relevant parts of the Bush-era tax cuts expire", as opposed to limiting deductions--as Krugman suggests we should--the "rich" and their accountants will get right to work.

So, hypothetically, let's say you're in the "rich" camp. And let's say you own your own small business, and that you have no intent whatsoever in paying another dime in income taxes. Here are a few ideas, off the top of my head:

1. You add a room, properly partitioned, to your house, throw in a desk, and viola!--you're doing 75% of your work from home (and deducting out the wazoo!).

2. You put your 16 year-old to work at the company and he starts buying all his own stuff. Thus transferring income from your high marginal tax rate to his very low rate.

3. Being that you're the oldest and highest paid in your company, you set up a defined benefit pension plan which allows you to deduct a very large annual contribution toward your own retirement.

4. Your out of town business trips become your family's vacation destinations.

5. You refinance your paid-for home to the hilt, use the proceeds to buy rental properties, and take interest and depreciation deductions to your heart's content.

Being no CPA, I no doubt just barely scratched the surface. Therefore, don't be surprised if, after your accountant gets finished with you, you're paying even less taxes than you were before they allowed the Bush-era tax cuts to expire. 

Personally, I'm all for permanently closing loopholes, but not in an effort to raise revenue (through raising taxes)--I believe we should aim for initial tax neutrality by simultaneously, and permanently (I know, nothing's permanent in Washington), reducing rates. In other words, do away with corporate welfare, simplify the code, create certainty and watch all that now-idle capital flow into the economy. Now that's how you ultimately raise revenue.

So why would Krugman promote a plan that would inspire such creative accounting and yet more lobbying--a plan that would draw resources away from economy-stimulating production? Well, partisanship, I'm afraid, is a most blinding affliction.

Friday, November 30, 2012

The U.S. Debt Inflection Point???

I listened to a CNBC debate the other afternoon featuring The Center for Economic and Policy Research's Dean Baker, and The American Enterprise Institute's James Pethokoukis. As the two competed to see who could audible the loudest without actually yelling, I heard Baker respond to a Pethokoukis jab at Washington's fiscal irresponsibility with a comment on how our record low treasury rates are an indication of how healthy we are in the eyes of the bond market.

Baker is making a most dangerous and, frankly, irresponsible assumption.

Any good, nonpartisan, market-savvy economist would tell you that markets move in cycles, that inflection points are impossible to predict, that the further the pendulum suspends in one direction--the longer its momentum pushes against gravity--the more forceful will be its move in the opposite direction when it finally capitulates.

Indeed, there was this one day when Greek bond prices subtly began their decent. When something began to unravel, when some bondholder somewhere woke up to the reality that even a country can't spend beyond its revenues forever. That a country whose leaders promote an entitlement mentality is doomed to squeeze its private sector to the point of exhaustion--to the point where the prospects for growing its way out of its bloated predicament is so dim that its creditors will demand a rate of return consistent with the risk they're taking. Thus the awakened, forward-thinking bondholder began dumping his Greek debt, and the rest followed his lead.

The inflection point for the U.S.--the home of the world's reserve currency--may very well be years away. And perhaps our policymakers will make better policy that will avert our creditors' exodus in the meantime. But that of course would depend upon us voters getting a clue. For as Harry Reid suggested yesterday, when the voter says "tax producers and don't touch entitlements", the self-interested policymaker has zero incentive to make better policy.

Here's an excerpt from my upcoming book Leaving Liberty?, Essays on Politics and Free-Market Thinking. This will be my plea to everyday consumers who typically wouldn't touch a book on politics and economics--who tend to believe most of what the media (both liberal and conservative) throws at them...


DAY 19: A Bloat of a Different Color

If I told you you’re spending 70 percent more than your annual income, you tell me: Will you be richer or poorer a year from now?

What if I told you you’re currently netting, on average, 250 calories per meal more than you’re burning off daily? You tell me: Would you be fatter or skinnier a year from now?

If you arrange your daily activities so as to net minimal physical stress, you tell me: Will your bones and muscles be more or less dense, and will they possess more or less capacity a year from now?

What would you say if I told you that you could lose weight by increasing your caloric intake by 70 percent daily? And what if I told you that you could become physically stronger while exerting even less over the next twelve months? As much as you’d love to believe me, you’d tell me I’m full of it.

But what if I were the recipient of the Nobel Prize in nutrition (were there such a thing)? Would you believe me then? Sadly, some of you (those who’d do just about anything not to diet or exercise) would. But alas, my academic prowess notwithstanding, my saying it wouldn’t amount to a hill-a-pork-n-beans twelve months from now.

Now what if I told you that you’re spending 70 percent more than your annual income? You tell me, will you be richer or poorer a year from now?And what would you say if I told you that you’d be in better fiscal shape if you spent even more over the next twelve months? I’d be full of it, right?

But what if you were a company? Still full of it. Ah, but what if you were a nation? Now there’s a bloat of an entirely different color. For at least one Nobel Prize-winning economist, many other not-Nobel-laureate economists, and oodles of pandering politicians would have you believe that very thing. The question is, do you?

Thursday, November 29, 2012

Will raising tax rates raise taxes? The Laffer Curve (white board lesson)

Dang! Just missed Senator Harry Reid's comments on today's budget talks. The follow-up commentary suggested he's frustrated with the other side's unwillingness to bend on tax increases--that they're not paying attention to the polls. Implying that the few hundred, or few thousand, people who responded to a set of questions posed over the phone say they want no cuts to entitlement programs and no tax increases for the "middle class". In other words, the people have spoken; tax the "rich", the "rich" have options--they can take on a higher tax burden. The non-rich have no options, they can't take on a higher tax burden--or cuts in social programs--especially in this economy. And of course that's true, well, mostly.

Let me straighten out that statement (by changing one word) and make it entirely true: The rich have options, they can take pass on a higher tax burden. The non-rich have no options, they can't take pass on a higher tax burden--or cuts in social programs--especially in this economy.

So, consumer spending is supposedly 2/3rds of the economy. The rich have employees, take vacations, go out to dinner, have housekeepers, etc. That (what the haves have) may seem unfair to some--it just feels right that the rich will have to cut back--but make no mistake, the rich cutting back means resources are taken, not only from them, but--arguably more so--from hard-working folks; the rich's employees, hotel employees, waiters and waitresses, busboys, cooks, parking attendants, caddies, scuba instructors, maids, etc. (that 2/3rds of GDP) and redistributed where politicians see fit. That is if the increase in tax rates actually results in more revenue for politicians to spend.

Here's an illustration on taxation that will help you understand the potential revenue implications of adjusting the rates--in either direction. This is an entirely commonsense view, and therefore will not appeal to the most partisan in either camp. Here's the link to a blogpost I reference in the video...

Tuesday, November 27, 2012

Buffett, having tea with Krugman?

If you happen to belong to the camp so enamored with Warren Buffett, not for his investment prowess, but for his lobbying to support his lately-favorite cause--government revenue--you'll love this excerpt from his op-ed in Sunday's NY Times

 Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

Makes sense, right? Well--his convenient comparison to a savings account notwithstanding--not to everybody. Being one who advises investors, I entirely reject the notion that taxes don't strongly influence investor decisions. In fact here's a quote from a man who would categorically refute Buffett's assertion--a man who, in many circles, is considered one of the best investors ever (per this article): 

If Berkshire, for example, were to be liquidated - which it most certainly won’t be -- shareholders would, under the new law, receive far less from the sales of our properties than they would have if the properties had been sold in the past, assuming identical prices in each sale. Though this outcome is theoretical in our case, the change in the law will very materially affect many companies. Therefore, it also affects our evaluations of prospective investments. Take, for example, producing oil and gas businesses, selected media companies, real estate companies, etc. that might wish to sell out. The values that their shareholders can realize are likely to be significantly reduced simply because the General Utilities Doctrine has been repealed - though the companies’ operating economics will not have changed adversely at all. My impression is that this important change in the law has not yet been fully comprehended by either investors or managers.

Funny thing is, that's the man himself, Warren Buffett, in his 1986 letter to Berkshire shareholders in response to changes in the 1986 tax reform act. My real-world experience suggests that the savvy 1986 Buffett had a much better handle on how investors think than does the generous -- with other people's money -- 2012 Buffett.

And of course he, as does everybody in the raise taxes camp, hearkens back to periods in history where the economy did fine while tax rates were higher. And of course he, like the rest, makes no mention of effective tax rates, demographics, the economic environment, etc.

And to top it all off, he thinks the government should strive to spend what amounts to 21% of GDP and to collect revenue amounting to 18.5%--in perpetuity. In other words, what leads to utter failure on the part of businesses and individuals (spending beyond means) somehow works for government. I think he's been having tea with Krugman. He's in essence proposing that government grab another $400 billion a year from the private sector (where incentives are true), while cutting public sector (where incentives are, let's say, less than true) spending by less than half that amount (his numbers). If he's truly out to support his pals in Washington--I can think of no other reason for this lunacy--he'd do better to educate them. That's assuming he understands better himself.

If anyone knows Mr. Buffett's email address, please forward him this link showing long-term capital gains tax rates and long-term capital gains tax revenue from 1977 through 2007 (2nd chart). Here are some highlights: 

1977 LT cap gain tax rate: 39.88%, LT cap gain tax paid: $ 7.9B
1978 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $10.4B
(Tax rate cut 30%, Tax receipts grew 32%)

1981 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $11.9B
1982 LT cap gain tax rate: 20.00%, LT cap gain tax paid: $12.5B
(Tax rate cut 29%, Tax receipts grew 5%)

1986 LT cap gain tax rate: 20.00%, LT cap gain tax paid: $50.8B
1987 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $31.8B
(Tax rate increase 40%, Tax receipts decline 37%)

1990 LT cap gain tax rate: 28.00%, LT cap gain tax paid: $25.9B
1991 LT cap gain tax rate: 28.93%, LT cap gain tax paid: $21.6B
(Tax rate increase 3%, Tax receipts decline 16%)

1992 LT cap gain tax rate: 28.93%, LT cap gain tax paid: $25.8B
1993 LT cap gain tax rate: 29.19%, LT cap gain tax paid: $31.4B
(Tax rate increase 1%, Tax receipts increase 22%)

1997 LT cap gain tax rate: 29.19%, LT cap gain tax paid: $69.6B
1998 LT cap gain tax rate: 21.19%, LT cap gain tax paid: $80.6B
(Tax rate cut 27%, Tax receipts increase 16%)

2003 LT cap gain tax rate: 21.05%, LT cap gain tax paid: $44.9B
2004 LT cap gain tax rate: 16.05%, LT cap gain tax paid: $66.2B
(Tax rate cut 24%, Tax receipts increase 47%)

2005 LT cap gain tax rate: 16.05%, LT cap gain tax paid: $92.3B
2006 LT cap gain tax rate: 15.70%, LT cap gain tax paid: $106.6B
(Tax rate cut 2%, Tax receipts increase 15%)

So, in the year immediately following a cut in the long-term capital gains tax rate, revenue actually rose 5 out of 5 times. In the year immediately following an increase in the long-term capital gains tax rate, revenue actually declined 2 out of 3 times (by $19B and $4.3B). In the only year when revenue increased immediately following a rate increase--a mere 1% increase--it did so by $5.6B.

If Mr. Buffett is sincerely interested in seeing greater government revenue from investors, history offers strong evidence that he ought to be pushing for lower, not higher, capital gains tax rates, or--at a minimum--making the current rates permanent. Or if he's inspired by some backward "fairness" reasoning, he should lobby for the tiniest of increases. 

Sunday, November 25, 2012

How Microsoft Produces Cashews...

Beautiful weather, fall colors, the wonders of nature do not come to mind when one thinks of Fresno, California. But for my wife and I, relaxing in lounge chairs on a late November morning is sheer bliss. Our backyard features three towering redwoods, two large pines and a deciduous tree that I can't identify. We are frequented by playful red squirrels and a variety of bird life. Yesterday morning a woodpecker came to visit.

As we watched the Nutall's (found him on Google) hungrily peck his way between the redwood's thick folds of bark -- after all manner of bug life -- I say to Judy, "isn't it fascinating how nature, spontaneously, takes care of herself? While pursuing his breakfast, the woodpecker is protecting the tree from the life-threatening damage caused by burrowing insects, and thus helping sustain the habitat for countless other organisms." Or words to that effect...

The same can be said of markets. As Judy and I pecked at a bowl of cashews while taking in nature's perfection, we were -- at the moment as oblivious to our beneficence as was the woodpecker to his -- supporting our local community (via our grocer), the community of Pleasanton, California (where Safeway packages the nuts), the maker of the plastic tubs they come in (its owners, employees, etc.), the transportation industry, etc., etc., etc., etc., etc., etc., etc. Not to mention Microsoft, Caterpillar, Apple, Pfizer and countless other U.S. exporters. Only a desire for the stuff U.S. dollars can buy would inspire the Indian, Vietnamese, Indonesian or Tanzanian (according to the label) cashew producer to cater to the U.S. consumer. At first blush one would assume that the U.S. climate isn't conducive to cashew production -- oh but one would be profoundly mistaken. The U.S. business climate, through the production of technology, industrial equipment, pharmaceuticals and myriad other goods and services is perfectly suited to the production of cashews in India.

No amount of government planning -- however bright the minds or good the intentions -- will ever remotely yield the universal benefits of free trade.

Friday, November 23, 2012

Ah, Freedom!

Target and Toys 'R Us opened their doors at 9pm on Thursday. Walmart's Black Friday sales began at 8pm. Edward S is thrilled because he and his wife celebrated her "Super Bowl of shopping" at a reasonable hour, which means he gets to play golf on Friday. Mike L is out on Thursday night shopping for a TV, but he's saddened that his kids are with the grandparents on Thanksgiving. And then there's your former Walmart employee using the Thursday-Black-Friday phenomenon to protest poor wages, benefits and working conditions.

On balance, the exit polls are suggesting that folks are pretty jazzed about not staying up all night to save a couple hundred bucks on a flat screen. I wonder how many of these enthusiastic opportunists have given thought to how all this retail activity is supporting jobs in China? While I suspect, if asked, many would voice a concern, I don't suspect that bringing it to their attention would save their VISAs a single swipe.

Ah, freedom -- it's a beautiful thing. The retailers' freedom to open their doors whenever they choose creates options for the Edward S's, and Mike L's of America. Edward gets to play a round of golf, and Mike's kids get more choices for fun with their well-rested Dad come Friday. As for the protesting former Walmart employee, well, he gets to complain awhile before he ventures out to explore better-paying options. Perhaps he has a knack for sales and can learn the golf business. Being that the Edward S's of the world will be hacking away on Friday -- some getting hooked on the sport, some hooking their drives -- both resulting in future equipment sales.

As for China, talk about your blessings! Can you imagine a world without the freedom to trade across borders? If so, you can imagine a world without affordable stuff. And a world without affordable stuff is a world with less stuff, and a world with less stuff is a world with fewer options, and a world with less stuff and fewer options is, well, just watch the following...

Thursday, November 22, 2012


As I sit here staring at my iPad, straining to find some pithy analogy befitting the moment (Thanksgiving morning), so many things come to mind. It occurs to me that while you and I may disagree on certain issues of the day—health care reform, government debt, “entitlement” programs, global warming, taxing the “rich”, regulations, etc.—we would yet find common ground on the deeper sentiments, the blessings of family, of health, of liberty and so on.

Here’s a little message we all can relate to — from my soon to be released daily devotional Leaving Liberty?, Essays on Politics and Free Market Thinking.

Wishing You and Yours a Very Happy Thanksgiving!!


DAY 1: The Good Old Days

When I look to the future I get very nervous, but when I look to the past I feel pretty good.—James Buchanan

I’m generally not one for reminiscing, but the other day I found myself in the throes of a sentimental moment. A friend forwarded me an e-mail titled To Those of Us Born 1925–1970, and man did it ever take me back. Back to my childhood, to a simpler time, to a time when kids could entertain themselves for hours on end—without the luxuries of video games or cable television. I literally got goose bumps as I was reminded of how my pals and I would pile into the backs of our parents’ pickups after Little League games. But now that I think about it, I’m not entirely sure whether my goose bumps were inspired by nostalgia or by my memories of how friggin’ cold it was riding in the back of a truck.

Ah, the good old days, when the future seemed so bright! Like during the Great Depression, WWII, Korea, Vietnam, the Cuban missile crisis, Kennedy’s assassination, Nixon’s resignation, the Arab oil embargo (remember those gas lines?), the Cold War, 19 percent mortgage rates, the junk bond scandal, the savings and loan crisis, the Mexican and Asian currency crises, the 1987 crash, the tech bubble, September 11, 2001, the real estate bubble, and the myriad events between all those I just listed? Seriously, if you were born between 1925 and 1970—or from 1970 on, for that matter—how often were you truly looking to the future with optimism?

In the words of economist James Buchanan, “When I look to the future I get very nervous, but when I look to the past I feel pretty good.”

Now in spite of my calamitous chronology of the past eighty-five years, I believe those of us born in the heart of the twentieth century indeed have much to be thankful for. Life was blissfully less complicated back when the notion of paying even a nickel (let alone a buck-fifty) for a bottle of water, as we drank from garden hoses, would have seemed utterly absurd. Yet while we will forever romanticize our past, we nonetheless strive mightily to make life more comfortable for ourselves and for our posterity. And clearly we have succeeded beyond our wildest expectations.

Pessimists consider themselves realists, and they call optimists idealists. But like Buchanan, when I look to the past and consider how far we’ve come, I’m thinking the optimists had it right.

Of course we have issues. We’ve always had issues, and of course we always will. You may indeed be pessimistic—you indeed have reason to be—and you’ll indeed be proven right every now and again. Or you may be an optimist—you indeed have reason to be—and you’ll indeed be proven right every now and again as well.

I have often wondered if we even have a choice, in terms of those predispositions. Perhaps it’s a chemical thing, or maybe it’s environmental. Speaking for myself, particularly when we’re talking public policy, I concede to both. But again, when I look at the world in retrospect, when my thinking transcends the headlines of the day, I can’t help but be optimistic in the long run.

If you consider yourself a “realist,” no offense—I did not intend here to criticize you. For as the buyer needs the seller, you are every bit as essential to the market’s function as the optimist.

Or, for that matter, if you’re an optimist, I did not intend here to inflate your ego. For you are the pessimist’s pawn. When Gloomy Gus gets it right, there has to be some bleary-eyed buyer to sell to.

Tuesday, November 20, 2012

Incentives (white board lesson)

So what's so bad about the "fiscal cliff"? Well, it depends on your bent. If you're all about tax fairness, and you're focused on tax rates, as opposed to the distribution of taxes paid (the upper 25% of income earners pay 80+% of all income taxes), then you're all for the expiration of the "Bush Tax Cuts"—on families earning over $250k per year that is. That'll also stick it to those greedy investors who, in the pursuit of profits, promote the capital markets that support the enterprises that support the American workforce—as the top tax on capital gains goes to 23.8% and dividends to 43.4% (although I expect compromise on dividends). If, on the other hand, you happen to be one of those crazy people who believe resources are better allocated in the private sector, you're not at all excited about taxes going up for anyone, regardless of how much they earn.

As for government spending, if you're in the "fairness" camp, I suspect you're adamantly opposed to the sequester (automatic spending cuts). If you're in that crazy resources-better-allocated-in-the-private-sector camp, you know that lower government spending ultimately means more resources left where the incentives promote lasting economic growth, as opposed to where the incentives promote lasting political careers.

Here's what I'm getting at: