Tuesday, July 31, 2012
Beware the King(s)
Apparently the past century of stock market gains and wealth accumulation was a “freak” anomaly, one to never be repeated. His incomparable (out of 7 billion) brain, has put all the pieces together. He has solved the great riddle; he has determined what he’s dubbed the “new normal”: That is, sub historical-average economic and asset-value growth, in perpetuity.
In essence; he knows precisely how all the world’s individuals will transact their affairs for eons to come.
He foresees advances in consumer technology,
and living standards in general.
He can predict the outcomes of political power grabs,
and natural disasters.
And has gauged the precise impact of each on the global economy.
He has indeed solved nature’s great mysteries.
What forever baffles me is the correlation between the capacity for thinking and the lack thereof for reason. The sad thing (seemingly, but surely not in every case) being; the larger the capacity of the brain (or perhaps the academic achievement, or perhaps the professional accomplishment), the larger the ego – the larger the ego, the lesser the humility – the lesser the humility, the greater the God complex – the greater the God complex, the greater the following – the greater the following, the greater the damage when a black swan (a purely random event) falls from the sky.
Happy Birthday Milton Friedman (video)
While he was a passionate champion of free markets, limited government and, most of all, personal liberty, I was always struck by the sincere respect he displayed for those who would challenge his ideology. Not that he wasn't direct when necessary, but, in spite of his utter command of every debate, he always expressed his views in gentlemanly fashion.
While there's much to be said about his wisdom, and his talents as an economist; his character, his style and his effectiveness as a communicator is what, to me, made him most unique among the "dismal scientists" of the 20th Century.
Here is Dr. Friedman, a true gentleman and scholar, helping Phil Donahue (who confused, as so many do today, capitalism with cronyism) understand the importance of the free enterprise system:
Sent from my iPad
Monday, July 30, 2012
Outside the ads
Sunday, July 29, 2012
Between the Proverbial Political Rock and a Hard Place
A society collapses when power-grabbing old men in government over-harvest private sector fruit and distribute it amongst masses who, having grown accustomed to government subsidy, lack the knowledge and motivation to plant trees of their own.
A society grows weak when power-grabbing old men in government grant political favor (monopolies, tax loopholes, tariffs, subsidies, etc.) to their chief sponsors at the expense of unsuspecting taxpayers.
A society grows weak when power-grabbing old men in government appropriate taxpayer funds to prop up failed institutions, leaving them free to make the same mistakes over and over again.
Enough with the
Of course we all enjoyed last week's rally in stocks. Clearly the powers that be have no interest in seeing the end of
Oh but the challenge facing the politician who aspires to future terms in office. As it stands, the Eurozone, as a body, sports a lower debt to GDP ratio than the United States. Do the Eurobond and you have your modern-day fix. The thing is, the Eurozone is not a fiscal body. It is an utter mess of clashing cultures. It sports the likes of Greece, whose under-producing people have been over-fed by an over-leveraged government for far too long. If you're the Greek prime minister you're between the proverbial rock and a hard place. Reject the austerity tied to your prospective bailout, and you say goodbye to the Euro, hello to hyper-inflation and goodbye to your job. Implement the austerity and your ex-public sector workers will vow to take you down with them.
There's a reason interest rates in Spain and Italy have (save for last Friday) spiked to unsustainable levels; it's because the likelihood that they'll be able to pay back their debts grows less certain by the day. And while clearly there's new resolve to print the present crisis away, the multi-trillion Euro question remains; will there be the political will to stick with the tough economic reforms that would make for something other than yet another very (very!) expensive lesson in moral hazard some years down the line?
Saturday, July 28, 2012
When the Human Spirit Meets with Liberty
And what do you suppose explains the incomparable advancement of the human condition that has occurred on these shores during the life of this very young country? It’s the momentum from our nation’s genesis. It’s what happens when the human spirit meets with liberty. Our wealth is not the result of one collective ideal. It is the result of millions of individuals pursuing their own separate interests.
Friday, July 27, 2012
Fooled By Fools
In Fooled by Randomness, Nassim Taleb (also wrote The Black Swan), an ex options trader, tells of how he keeps CNBC running in his office, but always muted. He jibes at how utterly ridiculous the talking heads appear when the sound’s turned off—and how ludicrous the notion that they have any clue whatsoever. To him the financial networks are pure entertainment, nothing more. Oh how I relate.
The last few days have delivered a surprising snapback in stock prices. And, with the sound off, I see the blokes (faces contorted and hands waiving), who were short the market last week, struggling desperately to either justify why this is yet another head-fake, or why, when they were bullish back in May, they were in fact right all along.
Beware the newsletter writers as well. Just the other day, one of the better ones (when he’s not predicting market direction), who’s been decidedly bearish, surprised me with words to the effect; ‘in spite of my bearish tone, I am indeed optimistic and presently aggressive with my own portfolio.’ I’m thinking “Wow! Some other clueless (as to market direction) prognosticator must have reminded this gent just how cheap (by several metrics) stocks look, how much idle liquidity exists, and how a little news out of Europe could (maybe) send the market off and running.”
My the damage (to his market-timing followers) an articulate extrovert analyst with a global audience can do.
Bending Context - OR - The truth flatters neither side
My conservative and liberal friends (who are bottom-line-truth oriented) and I agree that Mitt Romney's commercial which replays the President's infamous "you didn't build that" statement (leaving out "roads and bridges"), suggesting that he meant to say 'you didn't build your business', is an utterly fallacious and voter-manipulating low blow.
Now while there's no disputing the former, the latter is worthy of a little deeper scrutiny. Not that the President meant 'you didn't build your business', he indisputably didn't. But when we consider the extent to which government has infiltrated the private sector, perhaps those who would bend context to their political benefit may be (entirely by accident) onto something. Perhaps there are businesses in our midst that in fact wouldn't exist were it not for government favor. Perhaps, in essence, there are executives who indeed deserve the charge 'they didn't build that'. Think GM, Chrysler, AIG, and God knows how many other financial institutions and green energy firms that'd be gone were it not for American-style cronyism. Perhaps the liberals are every bit as culpable as the conservatives when it comes to cozying up to big business. Perhaps they're just better at concealing it.
Anthony Gregory, while he was "charitable" in not hammering the conservatives for taking the President's (less-so Ms. Warren's) words out of context, makes the point marvelously in his post Then, Who did Build it, Mr. President?
Tuesday, July 24, 2012
Waiting on the iPhone 5
Trust me, Apple's day will come (think Yahoo, RIM, Microsoft, etc.). I just don't think it's today...
They'll still be there...
Tonight's news is all about renewed fears that Spain won't escape a full-on bailout that would leave bond holders hanging and move Italy to the front of the line.
Like I've said many times here lately, never confuse volatility with loss. The companies whose stocks occupy your equity funds remain lean and profitable, while traders look to gamble shareholder emotion into daily winnings. All the while you and I pay to do stuff: Like drink our coffee, eat our veggies, text our kids, gas our cars, wash our cars, wash the clothes, cool the house, go to the movies, watch ESPN, tip the waiter, shop for school clothes, get the haircut, go to the dentist, play some golf, read a book, contribute to the IRA, take the kids camping, and plan that dream vacation to Spain and Italy (yes, they'll still be there)...
Thursday, July 19, 2012
Alan Greenspan, in his younger days, was a disciple of Ayn Rand (Atlas Shrugged) - the mid-twentieth century libertarian icon. He authored several of the essays featured in her collection Capitalism an Unknown Ideal. I assure you, the Alan Greenspan of the Rand era was a free market ideologue in a big way. And I'd bet real money that, had he remained in the private sector, he would have fervently denounced the kinds of crony bailouts he himself, as the Federal Reserve Board Chairman, orchestrated during the post-Rand era.
Professor Ben Bernanke seemed to be a good honest pick for the Fed post. And I suspect (haven't read the writings of his youth like I have Greenspan's) Doctor Bernanke would have fervently denounced the pre-re-appointment closed-door sessions with politicians and the crony bailouts orchestrated by Chairman Bernanke.
If Germany's Prime Minister (A. Merkel) were Italy's Prime Minister (M. Monti), make no mistake, she'd be pushing big time for a Eurobond. If Italy's Prime Minister were Germany's Prime Minister, make no mistake, he'd be resisting it big time.
Forget ideology, today's policywielders are mere microcosms of the electorates they represent. Merkel is the embodiment of today's arrogant German, who doesn't realize that he's been the chief beneficiary of the Euro experiment. He thinks his prosperity is entirely his own doing. Again, if she were Italy's Prime Minister, she'd embody the perspective of today's Italian voter.
Some of my conservative friends think President Obama is an ideologue planted here to turn the United States into something that would make Cuba look like Hong Kong (#1 on the Economic Freedom Index). Books (I'm told) have been written proving, through the dissecting of every utterance of his political career, this conspiracy conclusively. I'm a skeptic. Now you might say "skeptic shmeptic" and throw the Affordable Care Act in my face. "Nobody (according to the polls) wanted it - and he still pushed it through. So there!" Well sure, nobody wanted "it", but "everybody" wanted to keep their kids on till they're 26. Everybody wanted no preexisting conditions, etc. And believe you me, certain big-monied players in the health care sector wanted it big time as well. Besides, "everybody" believes our health care system is the definitiion of dysfunctional. Going after health care reform, given his early-term political mojo, was a no-brainer for a talented community organizer. Doesn't make him a communist.
"So", you say, "what about all the class warfare stuff?" What about it? Like that's Obama's creation. Class warmongering has been a tool for the left since Christ was a cadet. Heck, it would be a tool for the right (was for a minute or two for Romney) if they thought it would work.
Let me cut to the chase and make my point. We have only ourselves to blame. We have to wake up folks and realize that ultimately we are the puppet masters. We know intuitively, contrary to what any condescending economist would have us believe, that no institution (home, company or country) can survive forever on borrowed money and corporate and union buddybuddying. Today's politician is as politically greedy an animal as there's ever been, and there's no changing him. Who we can change however is us. Tea Partiers and Occupiers, you may not like their styles, but you have to admit, they both have legitimate gripes. The Tea Partiers say they want smaller, less intrusive, government. Amen brothers and sisters! Although when I watched one of their cofounders endorse Santorum I began to wonder. Occupiers want to end cronyism. Amen brothers and sisters! Although I still don't get why they wasted their time on Wall Street. Politicians, not CEOs, are the ones beholding to the 99%.
On a substantially smaller scale I have this inventory of articles, some complete, some half-written. I keep my iPad with me at virtually all times. When an idea comes to me, I grab it and start typing (often just a sentence or two as a reminder for my early morning writing sessions). I had a friend tell me recently that he drove by me somewhere over Pacheco Pass (California) - I had pulled off to the side of the road. He didn
Wednesday, July 18, 2012
Eye Opening - Or - Really? Middle Class Stagnation?
I was born in 1962. And I just learned, as you'll see in a minute, that I am older than dirt. The following was sent to me by a friend who received this from a friend, who received this from a friend, and so on. You'll agree that this is the author longing for the days of old - if not just waxing nostalgic. And I do indeed appreciate everything about the message.
But I'm going to use this little romantic essay to make an entirely different point. It has become politically in vogue of late to paint the middle-class the victim of an American system gone awry. A system that has, some would allege, offered the middle-class virtually nothing but stagnation. Apparently, the average American's wage, adjusted for inflation, hasn't budged over the past 40 years. The problem being; the politician would have us associate wage, by itself, with lifestyle. With no concessions for productivity gains across all sectorsconsumer technology, employer-sponsored benefits, etc.
Read the following and perhaps, like me, you'll understand how pragmatically inaccurate, and of course manipulative, the politicians' claims might be. And, in reality, just how far the middle-class has come over the past few decades. In fact, compare the following to the lifestyle of today's American receiving government aid. Hmm...
... THOUGHT YOU MIGHT ENJOY THIS ...
'Someone asked the other day, 'What was your favorite fast food when you were growing up?'
'We didn't have fast food when I was growing up,'
I informed him.
'All the food was slow.'
'C'mon, seriously. Where did you eat?'
'It was a place called 'at home,'' I explained. !
'Mom cooked every day and when Dad got home from work, we sat down together at the dining room table, and if I didn't like what she put on my plate I was allowed to sit there until I did like it.'
By this time, the kid was laughing so hard I was afraid he was going to suffer serious internal damage, so I didn't tell him the part about how I had to have permission to leave the table.
But here are some other things I would have told him about my childhood if I figured his system could have handled it :
Some parents NEVER owned their own house, never wore Levis, never set foot on a golf course, never traveled out of the country or had a credit card.
In their later years they had something called a revolving charge card. The card was good only at Sears Roebuck. Or maybe it was Sears &Roebuck.
Either way, there is no Roebuck anymore. Maybe he died.
My parents never drove me to soccer practice. This was mostly because we never had heard of soccer.
I had a bicycle that weighed probably 50 pounds, and only had one speed, (slow)
We didn't have a television in our house until I was 19.
It was, of course, black and white, and the station went off the air at midnight, after playing the national anthem and a poem about God; it came back on the air at about 6 a..m. and there was usually a locally produced news and farm show on, featuring local people.
I was 21 before I tasted my first pizza, it was called 'pizza pie.' When I bit into it, I burned the roof of my mouth and the cheese slid off, swung down, plastered itself against my chin and burned that, too. It's still the best pizza I ever had.
I never had a telephone in my room. The only phone in the house was in the living room and it was on a party line. Before you could dial, you had to listen and make sure some people you didn't know weren't already using the line.
Pizzas were not delivered to our home But milk was.
All newspapers were delivered by boys and all boys delivered newspapers --my brother delivered a newspaper, six days a week.. It cost 7 cents a paper, of which he got to keep 2 cents. He had to get up at6AM every morning. On Saturday , he had to collect the 42 cents from his customers. His favorite customers were the ones who gave him 50 cents and told him to keep the change. His least favorite customers were the ones who seemed to never behome on collection day.
Movie stars kissed with their mouths shut. At least, they did in the movies. There were no movie ratings because all movies were responsibly produced for everyone to enjoy viewing, without profanity or violence or most anything offensive.
If you grew up in a generation before there was fast food, you may want to share some of these memories with your children or grandchildren Just don't blame me if they bust a gut laughing.
Growing up isn't what it used to be, is it?
MEMORIES from a friend :
My Dad is cleaning out my grandmother's house (she died in December) and he brought me an old Royal Crown Cola bottle. In the bottle top was a stopper with a bunch of holes in it.. I knew immediately what it was, but my daughter had no idea. She thought they had tried to make it a salt shaker or something. I knew it as the bottle that sat on the end of the ironing board to 'sprinkle' clothes with because we didn't have steam irons. Man, I am old.
How many do you remember?
Head lights dimmer switches on the floor.
Ignition switches on the dashboard.
Heaters mounted on the inside of the fire wall.
Real ice boxes.
Pant leg clips for bicycles without chain guards.
Soldering irons you heat on a gas burner.
Using hand signals for cars without turn signals.
Older Than Dirt Quiz :
Count all the ones that you remember not the ones you were told about. Ratings at the bottom.
1. Blackjack chewing gum
2.Wax Coke-shaped bottles with colored sugar water
3. Candy cigarettes
4. Soda pop machines that dispensed glass bottles
5. Coffee shops or diners with tableside juke boxes
6. Home milk delivery in glass bottles with cardboard stoppers
7. Party lines on the telephone
8 Newsreels before the movie
9. P.F. Flyers
10. Butch wax
11.. TV test patterns that came on at night after the last show and were there until TV shows started again in
the morning. (there were only 3 channels...[if you were fortunate])
13. Howdy Doody
14. 45 RPM records
15. S& H greenstamps
17. Metal ice trays with lever
18. Mimeograph paper
19. Blue flashbulb
21. Roller skate keys
22. Cork popguns
25. Wash tub wringers
If you remembered 0-5 = You're still young
If you remembered 6-10 = You are getting older
If you remembered 11-15 = Don't tell your age,
If you remembered 16-25 = You' re older than dirt!
I might be older than dirt but those memories are some of the best parts of my life.
Don't forget to pass this along!!
Especially to all your really OLD friends....
Tuesday, July 17, 2012
Heads in their A**es Part 2 (video)
It appears that President Obama is gaining some traction on this one. As Romney, the consummate capitalist yet clumsy campaigner, stands frozen in the headlights. He knows there's a compelling riposte, but he knows not how to articulate it. He clearly has no more regard for the consumer's capacity to understand than do Reid and Boehner.
I know many of you struggle with this one. But think about it folks: The U.S.'s (maturing) 300 million represents a mere 4% of the world population. You are sorely mistaken if you believe protectionism, in way, shape or form, can lead to prosperity.
Here's Milton Friedman paraphrasing Leonard Read's I, Pencil.
Monday, July 16, 2012
Harry Reid and John Boehner, both with their heads up their A**es on the Olympic Uniform Issue
U.S. textile shipments totaled $53 billion in 2011. The U.S. textile industry is the third largest exporter of textile products in the world. Exports in 2010 grew 13.4 percent to more than $17 billion in 2011. Total textile and apparel exports were a record $22.4 billion.” “The U.S. textile industry exported to more than 170 countries, with 22 countries buying more than $100 million a year.
Good thing [for U.S. textile workers] our foreign customers’ political leaders aren't the Harry Reid types and calling for a burning of the products they determined were best produced in America (*Reid says pile up the U.S. Olympic uniforms sewn in China and burn em).
*Dear Mr. Reid, please get your head out of your a** and think.
*Same goes for you Speaker Boehner. You said the Olympic Committee “should know better”. You should know better sir – pretending to be a free trade advocate then turning around and hypocritically playing to a misinformed electorate.
If the U.S. textile industry continues to make gains in productivity, who knows, perhaps our next Olympic team’s outfits will be sewn (I distinguish ‘sewn’ since no doubt the inputs come from many parts of the world – U.S. included) in America. Wouldn't that be great? Sure, but only if it makes great business sense.
Sunday, July 15, 2012
The Butterfly Effect (and a video)
Economists and gurus of all stripes will (virtually) never cop to their (of course it’s everybody’s) cluelessness. For economists, it’s forever the counter-factual. The champions of fiscal stimulus told us that without the $800+ billion spending package unemployment would go north of 8%. Well, with the package, the jobless rate went north of 10%, and remains north of 8% today. Of course, to them, this only proves that we needed the stimulus even more desperately than they originally forecast. They now claim, in arrogant I-told-you-so fashion, that without it, unemployment would've gone into the teens. Shame on us for ever doubting them.
But the market gurus take the cake. They’ll make 200 guesses over 10 years, get lucky on 81, then feature one or more of those 81 in every article and ad selling their newsletter subscription, newest book or, worse (and scariest) yet, their money management services. The sad thing is, a few of these guys and gals have some decent insights to offer. But they forever kill it with me the moment they claim to have foretold (for example) back in the early 2000s just how the last ten years would play out—as yet another (my 81 out of 200 example—who has 1.5 million subscribers to his newsletter) tried recently. I have yet to Google (I’m now finding newsletters that record and track their every prediction) even one of these prognosticators without finding him or her to be sorely misleading (by professing predictive prowess) his or her readers. Not that the claim in question isn't valid, it’s just that for every one lucky guess I’ll discover three others where he or she entirely missed the mark. I mean think about it; if they indeed could accurately forecast anything, why the hell would they forecast it for you and me? They’d be trillionaires. And they’d confine their predictions to their own trading accounts (for their strategies wouldn't work if everyone followed them), while on their yachts sipping dom perignon and/or curing world hunger.
So what are we, as investors, to do? In my too-humble-to-forecast opinion we default to the cyclical nature of all things, to fundamental fiscal values and to fundamental valuations. Cyclicality, in economic terms, would be the movement between expansion and contraction—intensified or muted in both directions by man’s (our elected and appointed officials’) efforts to control nature, and, at times, by mother nature herself (see video). In financial markets that would be your bull and bear markets—intensified in both directions by man’s greed (tech in the 90s, real estate in the mid 00s) and by his fear (tech in the early 00s, real estate in the late 00s). Fundamental fiscal values—the values of fiscally sound families, companies and countries—come into play when we’re talking public policy: Policymakers simply can’t borrow beyond their countries’ means, centrally plan their economies and subsidize the efforts of their cronies without ultimately exacting great suffering onto those who naively voted them into office (think today’s Europe). Fundamental valuations for stocks would be the price of shares relative to earnings, earnings growth, book value, free cash flow, dividends, liquidity and interest rates. For bonds it would be simply where yields sit (historically speaking) relative to maturities and credit quality.
The global economy recently suffered what’s been dubbed the “Greatest Recession Since the Great Depression”. Current pace notwithstanding, I don’t suspect man has yet entirely circumvented the economic cycle. Egregiously poor public policy is playing out in Europe (shame on us here in America if we can’t recognize where they went wrong and keep from making the same mistakes). While stocks have rebounded measurably from the 2009 lows, valuations remain relatively (historically speaking) compelling while bond prices are trading at valuations I never imagined (prices extremely high, yields extremely low).
All that said and you’re still desperate to know: When will stock prices trade where earnings (by historical norms) would put them? And when’s the bond bubble going to burst?
Okay you win. Against my better judgment I’ll offer my forecast. But I’ll need a little time to formulate, then I’ll get back to you. And while I’m at it I’ll figure out precisely when the next hurricane will hit the Midwest, and how the world economy will fare as seven billion personalities allocate their diverse resources in the weeks and months to come.
Saturday, July 14, 2012
Trump's not so ignorant after all!
Now of course a man so passionate for protecting U.S. manufacturing jobs would insist that his own product line promote that cause. Right?
Well, I'm happy to report he's not entirely the ignoramous I pegged him to be. That's right folks, I can hardly believe it myself, but Donald Trump's signature collection is manufactured in, yes, China.
Take a look at the picture Don Boudreaux's son took (attached to this article) during a recent trip to Macys:
Friday, July 13, 2012
Piece-a-cake! The ease of calling short-term market direction...
Yep, calling short-term market direction is a piece-a-cake. But then again; I've been doing this for 28 years :).
Here's a little video I put together 2 weeks ago today - the last time the Dow jumped 200+ - to help you understand what can inspire big jumps in stock prices in a pessimistic environment.
The Upside to Outsourcing
The Upside to Outsourcing
There's no more pernicious and politically abused fallacy existing today (save for all the other pernicious and politically abused protectionist fallacies) than the notion that outsourcing is bad for the outsourcer's home economy. Unless however, making the goods the home country consumer demands as cost-effectively, and therefore as inexpensively, to that consumer as possible is a bad thing. Unless directly increasing that consumer's discretionary income, and therefore improving his or her lifestyle, is a bad thing. Unless creating jobs in the industries that capture that discretionary income is a bad thing. Unless unleashing capital to invest in innovative, life-improving, economy-advancing products is a bad thing.
Yes, we can name the citizens who lose their jobs due to outsourcing. And that's where the politician enters to exploit virtually everyone's misconception. The fact that it's impossible to immediately quantify the ultimate (numerous) macro benefits of efficiency gains (whether they be employing cheaper labor or technology) makes an easy case for the politician more concerned with gaining votes than gaining real advantages for the voter.
Oh, almost forgot; if you can't get passed the trade deficit fallacy (my previous efforts notwithstanding), you should then applaud all manner of foreign investment. For it indeed puts downward pressure on the so called trade deficit. Why? Because those investment (U.S.) dollars (which don't increase the trade deficit because they're not being used to import items) will have to find their way back to the U.S.. And to the extent they buy U.S. stuff, they lower the "deficit".
From Michael Kinsley's LA Times Article Oursourcing's Bad Rap:
"But most economists believe in the theory of free trade, which holds that a nation cannot prosper by denying its citizens the benefit of cheap foreign labor. It's a hard sell because the victims are concentrated and easy to identify, while the benefit is diffused through the whole economy. That's why so many politicians pay obeisance to free trade in the abstract but oppose it in the particular."
And here's Don Boudreaux bringing it home by analogizing the utter lunacy of protectionism:
"If restricting competition were a wise policy for periods of high unemployment, government should curb not only auto imports, but also domestic sales of used cars. (Doing so would spur domestic auto production.) If raising tariffs on foreign goods is appropriate when unemployment is high, then it
Thursday, July 12, 2012
Wednesday, July 11, 2012
The Commonsense CEO (of a country) Creed - Or - Our Present Predicament is Entirely of Our Own Doing
Let's say you're the Chairman and CEO of the world's largest corporation (from here on 'you' and 'the corporation' will be synonymous). And let's say you're mutually owned. That is, your shares are divided among the very individuals, one share apiece, to whom you market your wares. You have roughly three hundred million shareholders/customers. You, for a fee (income tax), provide, among other things, roads and highway construction and maintenance, school construction and administration, and domestic security/defense. You help your customers adjudicate conflicts amongst one another (enforce the rule of law), you administer/manage their compulsory retirement and senior health care plans, and you administer their monetary system. You're also a huge benefactor to folks in need. In fact, you provide services to 125 million+ individuals nearly free of charge.
Your business is cyclical. That is, while you're considered a consumer staple, your revenue (tax receipts) fluctuates measurably with the economic cycle. I.e., when, during recessions, your customers' incomes decline, so does yours (naturally). And when, during expansions, your customers' incomes rise, yours does as well. You are considered the world's best credit risk. You therefore enjoy virtually unlimited access to capital at the lowest rates possible. But nonetheless, you understand the laws of [business] nature; that, when the economy (and consequently your revenue) contracts, you have to make the necessary adjustments. That is, you lay off nonessential workers, you cut back on nonessential (low margin) services, you curtail any and all major initiatives that would strain present reserves and, at a minimum, you keep prices (taxes) steady while you look for ways to cut prices (taxes) where feasible. And of course you'll have to cut back measurably on your charitable activities.
You understand that, being the world's largest and most powerful organization, it is critical that you never abuse your power, and that you run your company as efficiently and profitably as possible. Thus far you have supplied the infrastructure to allow your best and brightest to prosper. In fact the most successful five percent of your customers account for fifty-five percent of your revenue. Your top twenty percent account for roughly eighty percent of your business. While you must treat your best customers well, you have to keep a very close eye on them. They are notorious for lobbying you to bend the rules in their favor. They do this because they understand the power you [can] wield over the economy. You therefore have to keep a very tight rein on your management personnel (Congress) as well. As they are appointed by vote of your shareholders/customers. They can thus be easily captured by special interest groups of all stripes.
While during good times you have expanded your product line, you understand that ultimately your bread and butter is the running of the monetary system, enforcing the rule of law, and providing national security. Otherwise it's critical that you stay out of the way (again, never abusing your power) and allow your shareholders/customers the freedom to take risks, to construct their lives however they see fit (within the rule of law), the freedom to succeed beyond their wildest expectations, and, very importantly, to fail when they miscalculate the risks they take.
This my fellow shareholders is how our country should be run. Those who would have us deviate from this model, their academic achievements, political ambitions and (perhaps) good intentions notwithstanding, do not understand how to run a successful enterprise, nor do they understand the basic nature of a free market system. This is not lalaland thinking, this is the thinking we need to (re)adopt in a hurry to get our nation on track.
Clearly, our current CEO and his immediate predecessor (opposite parties btw), had too much in common (platforms notwithstanding). Neither understand/understood business basics and are/were easy prey for special interests. But those are the kinds of characters we appoint over and over again. Perhaps those are the only kinds of characters who would run for office [although you could argue that Romney has the business know how (that's good), but I suspect, like most (if not all) politicians, he's an easy capture for his supportive special interests]. So here's the thing; we have to make it in their political best interests to do the right things. I maintain that the character of the office is a reflection of the character of the nation. Politicians, of all stripes, will bend to the will of the voter. Therefore it's us who haven't understood business basics and it's us who have been easy prey for special interests (i.e., our present predicament is entirely of our own doing). And therefore it's us who have get US back on track.
Monday, July 9, 2012
Sunday, July 8, 2012
Cutting to the Chase - And - Italy, America's Wakeup Call
Part One: Cutting to the Chase
"Job Weakness Starts to Define Landscape of Election Year"
The question is; is it fair to judge a presidency based on the employment experience during its term? Typically no. This time, perhaps. Employment growth typically comes late to a recovery. Employers hold out as long as possible after a recession before adding labor (their largest expense). What's been atypical about this recovery is the palpable uncertainty over future tax rates and regulations. This clearly reflects our lack of leadership. The next question would be; are we talking lack of leadership from the White House or the Hill or both?
"Running Out of Options, Euro Zone May Face a Stark Choice"
Even the measures agreed to during the recent EU summit won't do the trick. I'd place the odds of these "fixes" buying enough time for countries that have been constrained by profligacy and corruption* for decades to grow themselves out of their messes at somewhere between cero and nichts. The "stark choice" being simply: scrap the Euro altogether or do the Eurobond. My money's on the latter.
"Earnings are the Next Big Test for Stocks"
Yep,this week begins Q2 earnings reporting season. Alcoa is the first out of the gate. I have to believe, in light of recent disappointing economic results [globally], that this season may be the worst we've seen in a while. But keep in mind, earnings have been consistently stellar for quite some time. Therefore the 'worst in a while' doesn't mean horrendous. I'm simply guessing (and I do mean guessing) we won't see 80% of the S&P 500 companies blowing away estimates this time around. But if I were a trader (which I'll never be) I'd be more focused on the Fed. The market's begging for yet more easing. That is, QE3.
"Signs We are Approaching a Zombie Economy"
The Fed has pumped a few trillion "into the economy". Well, not exactly. They've pumped a few trillion into bank reserves, and there that few trillion remains (the economy has to come and claim it). And they've lowered interest rates to levels not seen since the fall of Mesopotamia. So then; we have plenty of liquidity, record low interest rates, and sub 2% GDP. Keynesians call this a liquidity trap. I call it palpable uncertainty.
*Part Two: Italy, America's Wakeup Call
(Note: While I entirely sympathize with the following, it is my hope that in our efforts to rein in corporatism that we do not promote yet more business-stifling regulation and collectivist policies here in the United States. Crony capitalism today won't be hindered in the least by giving more power to one of the perpetrators. In fact the exact opposite is what's needed. That is, if we would aim to reduce the politician's power over business we would effectively reduce the incentive for business to capture the politician. The solution is therefore painfully (to the perpetrators) simple: Less government intervention into the economy, close all corporate tax loopholes (while lowering the rates), end all subsidies and tariffs (allowing all the competition the outside world can muster), and absolutely commit that under no circumstances are we to ever again bail out failed institutions (idealistic, I know). Note: not having finished the book, I don't know that Dr. Zingales doesn't draw the same conclusions.)
For a better understanding of why Italy is where it is, here are a few excerpts from University of Chicago Professor Luigi Zingales's recently pubished A Capitalism for the People.
"I came here in 1988 from Italy because I was trying to escape a system that was fundamentally unfair. Italy invented the term nepotism and perfected the concept of cronyism, and it still lives by both. You are promoted by whom you know, not what you know."
"I emigrated to the United States because I realized that it offered me an inestimably brighter future than my native country. And when I got to America in 1988, I wasn't disappointed; I experienced for the first time the inebriating feeling that any goal was within my reach. I had finally arrived in a country where the limits to my dreams were set only by my abilities, not the people I knew."
"Wherever you stand on the political spectrum, whether you're a conservative Republican or a liberal Democrat or somewhere in between, I would gently suggest that you have no idea what it's like to live in a country where there is virtually no meritocracy and competition is considered a sin. Even emergency-room doctors in Italy are promoted on the basis of political affiliation instead of ability. Young people, rather than being told to study, are urged to "carry the bag" (fare il portaborse) for powerful people, in the hope of getting back some favors."
"The best way to get rich is to be politically connected and receive a government contract."
"The only protesters against the system came from the radical Left, which was less interested in changing the system than replacing it with a socialist one. In a country full of privileges based on birth, the Left, instead of fighting for equality of starting points, fought to eliminate all selection mechanisms, viewing them as discriminatory against the have-nots."
"But it wasn't long after arriving in the United States that I began to notice things that felt more like home - as if I were watching a movie I'd seen before. The first case was the 1998 rescue of the largest hedge fund of the time: Long Term Capital Management (LTCM)." "At the time Warren Buffet offered to rescue LTCM, though in a manner that would have cost its owners their entire investment. Instead of allowing that to happen, the Fed stepped in and coordinated a rescue effort that proved more generous to LTCM's investors and managers - a group that happened to include David Mullens, former vice chairman of the Fed." "the Fed had used moral suasion to alter the normal market rules - worse yet, for a friend."
"Under him (GW Bush), the Republican Party moved away from the promarket principles espoused by Ronald Reagan and became increasingly pro-big business, placing a tariff on imported steel in 2002 to protect American manufacturers, for example, and offering corporations special rates to repatriate their profits. At the same time, Democrats were becoming cozier with big-business interests, launching "public-private partnerships," a way to suck money from the government while pretending to do good."
"What I was watching was the transformation of American finance into an Italian-style crony-capitalist system. Indeed, in one way the American situation is worse, since Americans, unlike Italians, cannot place blame on one bad guy. Berlusconi is us. Through our retirement funds and stock investments, we are the owners of the very companies that lobby to grab our tax money and dominate our political life."
"At stake is not just our money but our freedom. Cronyism represses freedom of speech, eliminates the incentive to study, and jeopardizes career opportunities. It has robbed my home country of much of its potential for economic growth. I do not want it to rob the United States as well."`
Tuesday, July 3, 2012
Sheriff Andy Taylor on The American Revolution (video)
Who's to Blame, the Cheating Spouse or the Home-Wrecker?
I can write volumes on why government is the chief source of our modern-day woes, and cite instances of cronyism (from both sides of the aisle), throughout our entire history, that would make your blood boil. But for today I'll simply dispel Dr. Stiglitz notion that the repeal of Glass-Steagall set the stage for the 2008 credit crisis.
In a nutshell: The Glass-Steagall Act of 1933 restricted banks to simply banking. That is, commercial banks could not do investment banking, and vice versa. University of Chicago's Luigi Zingales in his book A Capitalism for the People states "One beneficial side effect of the Glass-Steagall Act, as with most of the other banking regulations, was to fragment the banking sector and reduce the financial industry's political power."
Glass-Steagall's dismantling came gradually from the '70s on. State restrictions on branching were the first to go. In essence, banks, under Glass-Steagall, were constrained in terms of branching throughout the states. But it took the Gramm-Leach-Bliley Act of 1999 to finally remove the separation between commercial and investment banks. And you can bet your bank account that G-L-B was inspired by heavy lobby from the financial industry. As Zingales points out (I paraphrase), 'the alignment of all the major players in the financial industry amplified their ability to influence policy.' It's therefore easy to understand why the Stiglitz's of the world are crying foul - and, in many ways, rightfully so.
But here's the thing, make that a couple things: One; suffice it to say (as I did above) that the larger the government, the larger the lobby. And the more successful the lobby, the larger the lobbying entity or industry. But where should we focus our
"The apex of this process of deregulation and consolidation was the 1999 passage of the Gramm-Leach-Bliley Act, which completely removed Glass-Steagall's separation between commercial and investment banks. Gramm-Leach-Bliley has been wrongly accused of playing a major role in the 2008 financial crisis; in fact, it had almost nothing to do with it. The major institutions that failed or were bailed out during the crisis were either pure investment banks that did not take advantage of the repeal of Glass-Steagall (e.g., Lehman Brothers, Bear Stearns, and Merrill Lynch) or purely commercial banks (e.g., Wachovia and Washington Mutual). The only exception was Citigroup*, which had merged its commercial and investment operations even before the Gramm-Leach-Bliley Act, betting that the law would be changed."
*By the way, Robert Rubin took a high paying position at Citi immediately following his term as Treasury Secretary (one of those blood-boiling incidents).
Thus, on the surface, the repeal of Glass-Steagall had virtually nothing to do with the '08 meltdown. The opinion that the repeal indeed saved the system stems from the fact that, with the exception of Lehman, the failed companies were taken over by the likes of JP Morgan, a company that took full advantage (combined commercial with investment banking) of Glass-Steagall's repeal. As opposed to outright failing and (like Lehman) dumping their garbage all over the credit markets.
I could be inclined to argue against Zingales' position, and say that Glass-Steagall's repeal in fact contributed greatly to the crisis, in that it allowed financial institutions to behemothize themselves - making them too big to fail. But here's the thing, "we" bailed out the little guys (the purely investment banks and the purely commercial banks). If even the little guys were deemed too big to fail, it clearly was not the result of Glass-Steagall.
Lastly: Consider the sheer volume of today's regulations. Per Zingales: "In 2010 we saw the passage The Dodd-Frank financial-reform bill, which was a staggering 2,319 pages long. Things were not always this way. The Glass-Steagall Act, which in 1933 separated investment banking from commercial banking, was just thirty-seven pages long. The act that created the Federal Reserve in 1913 ran to thirty-one pages. Even the recent Sarbanes-Oxley Act, which was written in response to the Enron and Worldcom scandals, was only sixty-six pages long. Tellingly, the Dodd-Frank bill was popularly called the "Lawyers' and Consultants' Full Employment Act of 2010." It may well have created more jobs than Obama's original 2009 stimulus package did.
Each page of regulation probably provides a year's worth of employment for several lobbyists and a couple lawyers and economists. This gigantic waste is never properly factored into our economic analysis. But the biggest cost is the smokescreen that overregulation creates. For centuries, in Continental Europe, laws were written in Latin, a language that ordinary citizens could not understand. As institutions were democratized, laws started being written in the vernacular. Overabundant regulation and the legalese that it is written in, achieves the same goal as Latin once did: to confuse the public."When I was writing regulations," says one retired EPA regulator, "I was told on more than one occasion to make sure I put in enough loopholes. The purpose of the complexity is to hide the loopholes.""
Again, the bigger the government, the more complex the regulations, the bigger the confusion, the bigger the cronyism. Clearly we have to turn our attention to the source, the adulterer—the politician.
Monday, July 2, 2012
You gotta, therefore, love markets!!
And you thought we needed the government to do all that.
Sunday, July 1, 2012
Fishing for a Net - Or - What you should be thinking about...
They intend to establish a single banking supervisor, you could call it a centralized banking authority - although there was no mention of a deposit insurance program or plan for handling failed banks (I suspect these will be some of the details to come). They plan to end the negative feedback loop between governments and banks (Spain's banks own a ton of Spain's debt) by allowing the European Stability Mechanism (ESM) to provide aid directly to the banks. The big tough-to-swallow concern for individual countries, with regard to the central banking authority, will be the inherent loss of sovereignty.
They also approved a 120 billion euro growth pact (stimulus plan) that would increase the lending capacity of the European Investment Bank (EIB), subsidize small businesses and issue project bonds (for energy, transportation and broadband). Critics cite the plan's relative small size (amounts to 1% of Euro Zone GDP).
Their immediate aim was to inspire confidence in Spain and Italy's creditors (allay default concerns and, consequently, bring down borrowing costs) and thus calm the financial markets. And that they did, if only for a day.
Of course the questions would be;
1. Is this the plan that finally puts a floor under the Euro Zone?
2. Can there be a floor without a Euro Bond?
My guesses would be;
1. Nope. But it is a step in the direction the world, ex-Germany, would have them head (notice I didn't say 'a step in the 'right' direction'). Could be a short to medium-term can-kicker.
2. Of course. There's always a floor. And they'd find it so much faster if they'd allow failed banks, and failed nations, to, well, fail - and markets to work. But if we're talking a policy-action-induced floor, I'd call that a net, you wouldn't think so. Merkel would (she implied) sign her own epitaph before signing onto a Euro Bond. Reality: if a Euro Bond is the ultimate can-kicker and she can pull it off and somehow delay the reading of her political career's eulogy, she'll do it. But it'll come under a different label.
As for you, the investor. What should you be thinking about? My sage (28 years as an advisor) advice would be to think about what you're going to barbecue for the kids on 4th of July. But knowing you'll be thinking about your portfolio too, here's something to chew on:
Assuming you're our client; here are a few of the (randomly selected) holdings in the mutual funds, and exchange traded funds (ETFs), that occupy the large cap US equity portion of your portfolio.
Bank of America
Johnson and Johnson
Procter and Gamble
Now ask yourself, when we're past the sure-to-be-weak Q2 economic numbers, Europe, the US election, the fiscal cliff, etc. - and on to bigger and better things - and a whole new set of worries - will these companies, with their scrubbed balance sheets and strong margins, be cranking out their products and services?
Remember, 85% of the world's people live in emerging markets. And make no mistake, that emerging 85% is thirsting for the infrastructure and lifestyles developed markets enjoy. I.e., there's a (long-term) world of opportunity for smart well-positioned companies.
In terms of your particular portfolio's allocation: If you're in or nearing retirement you'll have modest (defined by your temperament) equity exposure; with a bias toward companies like Kraft, Procter and Gamble, and Sysco. If you're further out (younger) and are more concerned with next Wednesday's tri tip than you are next Tuesday's Italian bond auction, you'll be heavily allocated to stocks; with a bias toward companies like Apple, Chesapeake Energy, and Cisco.
Letter to the New York Times (regarding Apple's "underpaid" Army)
In your June 23, 2012 article Apple's Retail Army, Long on Loyalty but Short on Pay, your journalist implies that your inquiry, four months ago, into Apple's compensation arrangement with retail employees has inspired an acceleration in pay increases. On behalf of the employees of the next unusually profitable enterprise you would attempt to aid, and the whole of society, I ask that you refrain. While your intentions I suspect would be noble, I'd like you to think a little deeper and consider the harm in your actions.
Apple has provided a wonderful opportunity for entry level Americans to learn from one of history's truly great organizations. By coercing a higher wage than market forces demand, you compel one, if not all, of the following outcomes (as Apple necessarily institutes margin-maintaining measures):Fewer new employment opportunities (you are aware of our current unemployment rate?), fewer skilled workers to step to rung two (then three, four and so on) of the economic ladder (you are aware of our nation's lack of skilled labor?), reduced employee benefits (Apple employees currently enjoy 401(k) matching, medical insurance, discounted pricing on Apple products and discounted pricing on Apple stock), higher iPhone, iPad, etc. prices to customers, lower dividends and capital gains to shareholders, and aslower pace of innovation.