Saturday, September 29, 2012

Where the rhetoric merges... (white board illustration)

So President Obama attacks Romney on Chinese investments, or, in other words, condemns his challenger for supporting U.S. exporters (for supplying Chinese companies with the [U.S.] currency they'd only accept if they desired U.S. goods, assets or services). Or, at a minimum, supporting the global flow of US dollars by investing in foreign securities. And while Romney's trustee unintentionally supports the U.S. economy while pursuing the trust beneficiaries' best interests, the trustor himself promises, should he take office, to double-down in the opposite direction. That is to collect from the American consumer (tariffing Chinese goods and thus forcing higher prices onto you and me) and the U.S. exporter (who recaptures those U.S. consumer dollars) and distribute to his corporate supporters.

If personal liberty is your hot button, there's, alas, no clear choice (on trade) between the two candidates. Their rhetoric entirely merges when it comes to protectionism.

Once again, here's my free-trade lesson. Forgive my hammering you on protectionism, but, in my daily discussions with clients, I find the consumer (his/her understanding) to be most abused on this issue.

This Week's TV Segment (video)

The Next American Idol - Or - We need our own Euro-moment - Or - Careful what you pine for...

Of all the arguments for limiting government, the fact that, in the best of circumstances, some number of elected agents composing an effective majority on a given issue determines the standard for 100% of the people (speaking of our representative democracy) is probably the most compelling. Of course it goes without saying that 51% (or 66%) - attending, alas, to their respective agendas - dictating a standard is infinitely better than .0000003% (a single dictator). But, nonetheless, those things we decide collectively should be, at all costs, as few as possible.

So what are we to do with this contagion we call government? This virus that consumes the limbic system of the under-achieving individual. Through sensory-dulling support (which includes a debit card, a cell phone, heavily subsidized rent, etc.), it destroys his motivation - he dare not dare to exploit the American opportunity. As for institutions, it opens itself and baits the highest bidder. Deals are struck. Capital, via subsidies, tariffs, regulatory engineering and tax loopholes, is redistributed to the politically favored. The alleged efficacy of a given regulation or program is trumpeted by the institutions it was designed to serve - the CEO turns politician.

Back-stage-Washington is where politicians bargain on behalf of their respective agendas. Front-stage is where they say what we want to hear. They know their constituent. They know the voting majority is more interested in the next American Idol than it is the next American President. Thus, the candidate with the swagger - the stage-presence - takes home the spoils.

Some (not, I presume, the American-Idol-worshipers) believe this to be the most important election of our time. I disagree. Yes, policy is at the root of the uncertainty holding the American economy at bay, but policy is a mere reflection of the wants of the populace. Obama, the consummate politician, the community organizer, has read the tea leaves and made his calculations. November 6 is entirely his to lose.

My conservative friends fear that he'll do great damage with four more years and no reelection to concern him. They pray for a Republican dominated congress to stonewall his efforts. Consider me agnostic. Let's say the Democrats take Congress and Obama wins another term. If his aim is to bring us to some socialist state, as some seem to fear, I suspect the markets will [severely] punish his efforts, and his party will abandon him faster than the Republicans abandoned GW Bush when the Iraqi conflict went awry. Should Romney and company sweep, what are the odds they'll muster the political will to affect meaningful spending reform in the face of this tepid economic recovery? Zero to none, I imagine.

I'm afraid we need our own Euro-moment before we get our nation back on track. Some see it coming sooner than later, and, again, I see no evidence suggesting either side has the will to force the kind of reforms that would avert such an event. Thus, if these seers are right (our comeupins coming sooner than later), and you're pining away over your candidate - well - just be careful what you pine for...

If Only...

"I do not choose to be a common man. It is my right to be uncommon—if I can. I seek opportunity—not security. I do not wish to be a kept citizen, humbled and dulled by having the state look after me. I want to take the calculated risk; to dream and to build, to fail and to succeed. I refuse to barter incentive for a dole. I prefer the challenges of life to the guaranteed existence; the thrill of fulfillment to the stale calm of utopia. I will not trade freedom for beneficence nor my dignity for a handout. I will never cower before any master nor bend to any threat. It is my heritage to stand erect, proud and unafraid; to think and act for myself, enjoy the benefit of my creations, and to face the world boldly and say, this I have done. All this is what it means to be an American."

So what sort of a character do you suppose penned the above?

He sought "opportunity - not security." A free-market ideologue for sure.

He would never be "humbled or dulled" by having the state look after him. He was fiercely opposed to welfare statism.

He wanted to take risks, "to dream and to build, to fail and to succeed." He preferred "the challenges of life to the guaranteed existence." He was adamantly opposed to bailouts.

He'd "not trade freedom for beneficence" nor his "dignity for a handout." He was an advocate for limited government.

He took full responsibility for his successes and his failures - he would "think and act for himself, enjoy the benefit of his creations, "and face the world boldly and say, this I have done."

This gentleman had to have been a fiercely independent entrepreneur. Surely a staunch conservative, wouldn't you agree?

Today's Republican voter can only pray that his candidate will somehow wake up, and find such a voice. To passionately, and unashamedly, trumpet the values, the character, espoused in this poem - this poem titled "My Creed" by Dean Alfange, head of the American Labor Party during the 1930s, and co-founder of the Liberal Party of New York in 1944.

If today's American citizen (let alone candidate), whether pledging allegiance to the left or right, could only adopt the principles of yesterday's "liberal", we might, at last, put an end to crony corporate welfare, reform our social welfare system, and show the world, once again, what it means to be a free, strong and prosperous nation.

Friday, September 28, 2012

Might as well jump!

Devising a temporary tax scheme ("Bush-era tax cuts", payroll tax holidays, cash for clunkers, homebuyers tax credits, etc.) is like asking a family to build their home on a cliff overlooking the ocean, while knowing a crushing tidal wave is heading their way.

Speaking of cliffs, more than a few economists (those crazy-accurate forecasters NOT!) predict that us going over the coming "fiscal cliff" (the expiring "Bush tax cuts" and the "payroll tax holiday", the beginning of taxes related to the new health care law, the end of certain business tax breaks and significant government spending cuts) is akin to economic suicide - assuredly plunging our fragile economy into yet another deep recession. Therefore, given the risk to the career of the sitting politician, odds are decent that we'll see - yes - extensions. Deals will be struck and the fiscal hurricane will turn and head back out to sea. But never, alas, to yield its momentum to the atmosphere. It'll remain a few miles off shore - stronger than ever (grows stronger in our denial) and very much in sight. And there we'll stand on the cliff's edge, watching, waiting, wondering. No more certain, no less liquid, and no more inspired to get our money working than we were in late 2012.

I say we might as well jump. I say we let the whole kit and kaboodle of tax cuts expire, and allow the spending cuts to take full-effect - and never look back. I can't deny the probability that we'll take our economic lumps, but we will have indeed remedied what many (me included) consider the (present) chief deterrent to growth; uncertainty. We may not like it, but at least we'll finally know the rules. Only then will we be able to look to the future and begin crafting smart permanent, certainty-inducing tax policy.

Yeah, I know, it ain't happening.

Saturday, September 22, 2012

Buffet in Reverse

The fact that Mitt and Ann Romney paid federal income taxes equal to 14% of their adjusted gross income in 2011 troubles me greatly. Apparently they decided to forego taking deductions they had coming for $1.75 million in charitable contributions. Taking those deductions would have lowered their effective rate to around 10%.

He's Warren Buffet in reverse:

Warren Buffet, while exploiting every opportunity the tax-code provides to reduce his tax burden, says he's for higher rates. Mitt Romney, on the other hand, while purposely subjecting himself to a higher tax bill, says he's for lower taxes. And, quite frankly, this is not the example the Republican nominee ought to be setting. A 10% effective tax rate on $13.7 million of income means he's engaged in the types of activities this country needs the most --- private investment activities. By not taking those charitable deductions, by making this political calculation, he in-effect took $550,000+ from the private sector and handed it over to Uncle Sam. Which further distorts his message.

If Romney doesn't (soon) get comfortable with Romney, he's done.

Friday, September 21, 2012

The American Consumer Economic Freedom Act (and a white board illustration)

Here's an excerpt from today's newsletter from Congressman Devin Nunes:

"today I introduced the Economic Freedom Alliance Act in the House of Representatives. The bill would advance global free trade through four measures:

*The Transatlantic Commerce and Trade Enhancement Act would authorize the U.S. President to conduct negotiations with the European Union toward a comprehensive free-trade agreement.

*The United States-Brazil Joint Commission on Commerce and Trade Act would establish a commission between the United States and Brazil to work toward dismantling mutual trade barriers, promoting commercial opportunities, and in the long-term, establishing free trade between the two nations.

*The Agriculture Trade Facilitation Act would establish U.S. negotiating objectives for removing improper sanitary and phytosanitary barriers to U.S. agricultural exports.

*The Generalized System of Preferences Improvement Act would reform the Generalized System of Preferences so that certain countries with rapidly developing economies will no longer receive trading preferences from the United States while blocking U.S. imports in their own markets. Instead, they will be encouraged to work with the United States to remove trade barriers on both sides.

Amid the burning American flags and charred U.S. embassies that dot the world landscape today, we should try a new approach. The U.S. is now negotiating a multilateral free-trade agreement with Mexico, Canada, Australia, and seven other nations through the Trans-Pacific Partnership. The Economic Freedom Alliance Act will expand this effort into the creation of a broad free-trade zone that unites us with peaceful, like-minded allies and sets clear conditions for U.S. friendship."

While I indeed applaud Rep. Nunes' efforts, I have a better idea. My bill would be called The American Consumer Economic Freedom Act (ACEFA).And itwould advance global free trade through two measures:

*The United States Unilateral Free Trade and Consumer Freedom Act would require the U.S. President to cease all trade negotiations (for there'd be no cause for negotiation) with presently friendly nations. The U.S. Consumer will remain entirely free to purchase whatever product he and she desires from any and all non-U.S. producers who choose to sell to the U.S. market.Under no circumstances whatsover aremeasures to be taken in retaliation for other nations' protectionist acts.

*The United States TaxpayerProtection Act would call for the immediate closure of the Export-Import Bank of the United States, and end all subsidies to, and special tax incentives for, U.S. exporters.

While ACEFA's sole aim is personal liberty, unintendedsocial benefits willaccrue as well. Such as peaceful international relations (you don't shoot your customer), an increase in U.S. exports (as the U.S. dollars spent on other countries' products find their way home), a net addition to U.S. jobs and an overall healthier U.S. economy (see video).

Click here for white board lesson

Thursday, September 20, 2012

QEEternity, The Bernanke Put

A contract guaranteeing an investor's right to sell a specified number of shares of a security at a set price (the strike price) by a set-date, thus binding another party to purchasing the security at the set price, is called a put option. Buying puts will protect an investor's position in the case of an unexpected decline in its share price. I.e., putting a floor under the price. Of course there ain't no free lunch. The buyer of the put must pay the would-be buyer of the stock a fee (called a premium) for his willingness to pay more than the stock is worth should the put-holder exercise his option (will do only if the stock falls below the strike price). And the closer the exercise price is to the actual price of the stock, the higher the premium.

In case you're wondering, that's essentially what they mean by "The Bernanke Put". Consensus has it that the Fed's willingness to print whatever amount of money for however long it takes to get this economy moving could bolster the stock market for Lord only knows how long - perhaps explaining the market's recent buoyancy. However, like a true put option, there's a cost. In the case of QE3Eternity, the obvious cost would be the pricing impact of ever-increasing the supply of money.

In my granola bar example, if you and 5 other desert-island-castaways bargain for the last granola bar in your possession, it's worth whatever amount of money your hungry friends have on them. If there's a dollar amongst them, assuming you're of a mind to sell, it's worth a dollar. If there's ten, it's worth ten. I.e., the supply of money growing faster than the production of goods = inflation.

The not-so-obvious cost would be the moral hazard of perpetually low borrowing rates. Here I'm thinking government borrowing. As you may have gathered from my recent rants, I find "politician" and "moral-hazard" to be synonymous. Washington can borrow money on the cheap, which could be huge in terms of reducing the deficit and the debt. However, alas, like the 2006 homeowner (now renter) who refinanced his mortgage and found himself with left-over cash flow and a home equity line of credit, our utterly-fearless leaders seem to have other things in mind.

Stay tuned...

Not your model of austerity

The new European Central Bank building.

Please, keep working your butt off...

SF Giant Melky Cabrera will be allowed to retain the National League batting title, in spite of having been found guilty of using performance-enhancing drugs AND sentenced to a 50-game suspension.

Joe Shmo will be allowed to retain the proceeds from the sale of a 60-inch flat screen, in spite of having been found guilty of stealing it from your neighbor's home AND sentenced to 50 days in jail.

Politicians, from both parties, remain in office, for multiple terms, in spite of having been found guilty of taking an ever-increasing amount of resources from you and your neighbor and delivering them to their supporters (individual and institutional) in other neighborhoods - AND do no time whatsoever.

Now you tell me: which of my three scenarios has the greatest negative impact on society?

MLB Commissioner Bud Selig is quoted in this video as saying "You can't change records, because once you get into that, it would never stop."

Apparently, according to Mr. Selig, it's just too much of a hassle to return stolen property. So sorry "#2", who shunned the needle, but please, stay clean.

And, according to the political powers that be, it's just too short-term painful to cut spending. So sorry hard-working taxpayer, but please, keep working your butt off.

Wednesday, September 19, 2012

Partisan hackery at its worst!

On CNBC this afternoon (I paraphrase):

Cato Institute's Dan Mitchell says if we simply restrain the growth of government by 2.5% annually for the next 10 years we'll balance the budget*.

His opponent (I tuned in late and missed his intro) says no can do. Washington has commitments to people whose needs are expanding at a rate that requires more than a 2.5% annual increase in government spending. And that allowing income taxes to revert to Clinton-era rates would solve the deficit issue.

I can't tell you the number of times I've heard that argument - that higher income tax rates did not derail the '90s booming economy (of course "they" leave "booming" out of the conversation) - and thus, clearly, they won't derail the present anything-but-booming economy (of course "they" make no mention of today's tepid growth rate).

That's like saying we diverted more water [than we do today] from the San Joaquin Valley directly to Los Angeles during a decade of record precipitation - whichproves conclusively that we can indeed give away more water and still produce bountiful crops, in spite of recent aridity.

Paralleling the '90's U.S. economy (a tech boom, a baby boom generation 15 years from retirement, etc.) with today's, for the purpose of promoting an agenda, is partisan hackery at its worst.

*Here's Mitchell's analysis...

Today's TV Segment (video)

How come Romney isn't running away with it?

So if this is indeed the worst economic recovery in the history of economic recoveries, how is it that Mitt Romney isn't destroying President Obama in the polls?

Three possibilities:

One speaks to voter myopia. While the recovery's weak, it's picked up some steam (albeit slightly) of late. I.e., it's trending better. And a better trend would support the status quo. In the reverse, think candidate Al Gore: The Democrats, you'd presume (coming out of the roaring '90s), would have had economically-inspired political mojo to burn. However, by election-time 2000, things had begun to cool (albeit slightly) - ushering in the presidency of GW Bush.

Two would simply be Mr. Romney's physical stiffness. He appears anything but comfortable in his own skin. And while his promises are grand, the longer it takes him to come up with detail, the more platitudinous they become. Remember Al Gore's lack of swagger?

Three would be the most disturbing (regardless of whom you support). That while both candidates make their promises, it may be the President who's promising all the right things (in a getting-yourself-reelected context). Consider:

According to the Pew Research Center*, in 1999, 74% of Americans agreed (to some degree) with the statement "Most who want to get ahead can make it if they are willing to work hard." As of 2011, that figure had fallen to 58%. Of course there's a stark economic contrast between the above periods. Folks in 1998 were living one of human history's greatest booms. Folks in 2011 just experienced all-time's second greatest bust. And the latter were exposed to a cronyism that its perpetrators (Washington and Wall Street) could no longer keep hidden. Thus it makes sense that Americans might be losing that old bust-your-butt spirit, at least for the moment. And when 42% of the populace feels hopeless, which campaign style do you suppose will attract the most votes?

With the debates, who knows how many more gaffes, attack ads and employment numbers to come, we're a long way from November 6.

*First saw the Pew stats in A Capitalism for the People.




Election-year ploy...

Found some confirmation for my bias (my position on protectionism) in this morning's Washington Post editorial titled An election year-ploy: Get tough on China.

To the extent that imports from China — or Mexico, which sells almost three times as much to the United States — reduce the cost of auto manufacturing, and hence the price of cars, they may help create more American jobs than they cost.


The fact is that China has plenty of ways to retaliate when this country protects specific industries; on balance, that retaliation may cost more American jobs.  Even if China does not retaliate, the higher production costs and higher consumer prices that trade protection imposes are not evenly distributed. Protectionist measures may “save” jobs for higher-paid workers at the expense of those who make less. These are the sorts of nuances and trade-offs to which we hope the winner of this election will pay more attention.  Though the United States and China are competing for global market share, avoiding an actual trade war is very much in both nations’ interest.

Tuesday, September 18, 2012

Insulting our intelligence...

Ben Bernanke gives his Fed's QE efforts credit for creating 2 million jobs. The man's IQ notwithstanding, what a profoundly presumptive, naive, and/or, quite frankly, an insulting-to-our-intelligence statement. But let's say, naively, that he's correct - that those QE $'s sitting [stubbornly] in bank excess reserves somehow create jobs. Well then great! Let's keep it up. It's a no-brainer! If all it takes is the creation of 2 trillion in new dollars to create 2 million jobs, we should do that till the cows come home. At that pace ($1 mill/job), another $5 trillion or so and we'll have won back all the jobs lost since the start of the Great Recession.

And, I suppose then, that as long as all that cash remains in banks' excess reserves - as long as they never actually push it into the economy - we needn't worry about inflation.

Like I said, insulting to our intelligence...

Monday, September 17, 2012

So what about the other 310 million? (white board lesson)

The White House has yet again filed a complaint with the WTO. This time accusing China of $1 billion in illegal subsidies for exports of cars and car parts. This plays beautifully in swing-state Ohio where the average voter is either entirely clueless, or cares about little else than the immediate benefits to the 850 thousand folks whose jobs are tied to the American auto industry. Well... when I put it that way - of course it's the latter! Who'd blame them? The problem is, there's another 310+ million Americans who the President is throwing under the bus. And, alas, given Romney's China-trade-bashing rhetoric, they're both on the same page on this one.

Make no mistake folks, protectionism is always bad news, but only for the protectionist country. The foreign customer benefits (as does the importing country's economy) when the exporting country spends its own taxpayers' money to buy down the price of its products.

Or, as Don Boudreaux put it in his open letter to Barak Obama;

Pres. Barack Obama
Campaign Trail, USA

Dear Mr. Obama:

Speaking today in Ohio, you bragged that your administration brought unfair-trade complaints against China “at nearly twice the rate” at which George W. Bush’s administration brought such complaints.  In other words, your administration…

… is nearly twice as active as was that of your predecessor at raising Americans’ cost of living by badgering suppliers to hike the prices charged on products such as consumer electronics, furniture, and footwear;

… has doubled-down on the Bush administration’s efforts to raise production costs for the many American producers who buy inputs such as zinc and oil-field-drilling equipment from Chinese manufacturers;

… is two times as likely to pander to the economically ignorant in order to grant special privileges to the politically powerful, all in efforts to prevent Americans from spending their money as they see fit.

And you’re proud of this record?

Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030


Here's my illustration on subsidies and solar panels:

Saturday, September 15, 2012

The Bull/Bear Debate - And - The real hazard going forward

It's hard to believe that while Europe remains a long way from getting its house in order, while U.S. 'headline' unemployment stays above 8%, while the U.S. borrows a trillion and a half a year just to pay its bills, and while the U.S. is heading full steam toward a "fiscal cliff" (tax increases, budget cuts, etc.), the Dow sits just a few hundred points shy of its all-time high.

Skeptics (bears) tell us there's no fundamental justification for it. That the market has been bid up on nothing more than the prospects for easy monetary policy as far as the eye can see. That, given all that I outlined above, there's another crash a coming.

Before I make the bulls' case, I'd like to point out that when the high profile "expert" arranges his (and his clients') portfolios to exploit a bear market, and there's no bear in sight, he ends up getting mauled. The media, allowing bears and bulls equal time, provides him the platform on which to try and sway investors to his way of thinking. That is, to convince them to sell, and thus preserve his career. And by the looks of the cash allocation in your average portfolio (a record 69% as of July 31), he's, thus far, made his case (at least in terms of keeping investors from diving in). But therein lies his problem. Because of this average allocation to cash, earning nothing, while stocks are on the rise, he's in all-out panic-mode. If cans get kicked further into the future (Europe's kicking it hard as we speak. And the likelihood of U.S. politicians tossing their political careers off the fiscal cliff is exceedingly low), thus inspiring that cash to rush to stocks, Dr. Doom is doomed.

And of course the same (the attempts to sway the public) goes for high profile bulls.

The bulls tell us that the fundamentals are compelling: That stocks, relative to earnings, are far from over-priced. That corporate balance sheets look their best ever. That liquidity is off the charts. And that interest rates are ridiculously low. And don't sweat the geo-political stuff, without it, stocks would not be this attractive. Pessimism is therefore a beautiful thing.

But how can stocks be cheap when their pushing all-time highs? It's not about the price per share, say the bulls, it's about the earnings relative to the price per share (in an historic context). You see the cumulative earnings of the companies comprising the S&P 500 (according to Bloomberg and S&P) came in at $51.68/share when the index hit 1,469 back in 1999. 2012's earnings look to be coming in north of $100/share, while, as we speak, the S&P sits at 1,466. Therefore, if we use '99 as our benchmark for over-valuation, matching it would take the S&P to 2,940 and the Dow to 27,000.

(Now wouldn't that be something? Yes, something to sell like mad!)

As you can see, while the stock indices flirt with their historic nominal highs, they're no where near their historic valuation highs. And that's what the bulls say we should focus on.

So then, BUY BUY BUY!! Right? Well..... not so fast. We have 2007 to talk about. In '07, when the S&P hit 1,468, its earnings came in at $87.72 per share, which represents a price to earnings ratio (p/e) of 16.73. An historically reasonable multiple, and no where near the lofty 28.42 p/e of 1999. And you know what happened between the fall of '07 and the spring of '09? The S&P plunged to 660. So yes, the bears indeed have something to chew on. Stock prices can tank even when valuations would suggest they shouldn't.

So now we're left to compare 2007, with its reasonable 16.73 p/e, and 2012, with its (estimated) compelling 14.37. If the bears have it right, and we indeed experience an unprecedented second epic bear market (of equal measure) in four years - using purely the p/e as our measure of value (it plunged to 10 in '09), we're looking at roughly a 30% hit to the S&P 500. However, stock prices in '07 fell further than did earnings. The S&P p/e took a 40% hit between '07 and '09, while the index itself dropped 55%. Therefore, to precisely match that decline, today's S&P would take a 41% hit (i.e.,137% of the decline in earnings).

Now hold on a minute, cry the bulls. In 2007 the real estate market was busting at the seams. Wall Street had gone wild on mortgage backed derivatives. The consumer was living in debt-ridden lalaland. Corporate balance sheets were no where near as healthy as they are today. Interest rates were much higher, and everyone was fully invested (remember portfolio cash sits today at a record 69%). Comparing today with '07 is like comparing green apples with over-ripe oranges. Sure, geo politics can still get screwy, but the corporate sector is in tip-top shape. While in 2007 it was fat, dumb and lazy. If the market takes an '07-'09 style hit, it'll be the buying opportunity of all time. Which again, following the most recent all-time buying opportunity by a mere four years, would be an unprecedented, and unlikely, event.

Now, all that said, I do believe in black swans. Those unannounced, unpredictable events that Nasim Taleb (author of bestsellers The Black Swan and Fooled by Randomness [two books I highly recommend]) says shape the world we live in. But the fact that we're talking about the potential for a near-term major decline in stocks disqualifies it entirely. Not that it won't happen, it just won't be a black swan - since so many are predicting it.

So I'll leave you today with this observation: The things we see coming, like the Euro Debt Crisis and the "fiscal cliff" are typically not the things that deliver long-term "negative" consequences. It's the events we don't see coming, like Lehman's collapse (the market was certain it'd be bailed out) and the bursting of the dotcom bubble that tend to provoke those phenomenal buying opportunities (market crashes). The real hazard facing us going forward (the makings of future black swans) is of the moral variety: the government's habit of rewarding bad behavior. I'll have more on that to come...

Friday, September 14, 2012

What I learned this week while in British Columbia (but first a commercial for my upcoming book)

I know that not all of my readers agree with all of my views. But I wonder if there aren

Bernanke is just being Bernanke - Or - Sorry, no conspiracy here

In event #4 of my "week to come" column I mentioned open-ended QE3. That would be a new round of money-printing and asset-purchasing with no specific dollar-limit or end-date. The objective would be to get those crazy-high mortgage rates down and pump more cash into the liquidity-starved banking sector. I mean if 3.5% mortgage rates isn't enough to get folks into the housing market, surely 2.5% will, right? And if a few trillion in excess reserves earning .25% on deposit at the Fed doesn't inspire banks to lend, surely adding an additional trillion or so will do the trick, don't you think? I mean you'd be chomping at the bit to lend a few hundred thousand to an everyday bloke for 30 years at 2.5%, wouldn't you?

Well, as you know, open-ended QE3 is indeed what they're now up to. But, as I imply above, something on the surface simply doesn't compute. Clearly, lack of monetary easing is not the problem. My best guess is that the Fed is counting on what they call the wealth effect. If they can somehow boost asset prices, perhaps holders of assets (wealthier on paper) will feel more confident and step out and make a few purchases. My fear is, in the long-run, higher prices are indeed what they'll get. But not to the limited extent they had bargained for. You see the price of a given commodity can rise out of sheer demand, or out of sheer lack thereof for the dollar. And, at the moment, they'll take it any way they can get it. However, by essentially busting the pipe leading to the spigot, the Fed is inviting serious down-the-road inflation in a very big way.

As for the popular conspiracy theory - that Bernanke is diabolically self-centered and out to seal victory for President Obama, and assure his own reappointment in 2014 - consider the fact that he doesn't act alone, and that he was appointed by a Republican. A Republican who wanted a fed chairman who he knew would be easy on monetary policy*. If Bernanke is anything, he's a consistent Keynesian (although he has warned, sternly, that the burgeoning national debt poses a huge economic threat if Washington doesn't change course in a hurry. Conversely, manipulating treasury rates ever-lower only incentivizes more of the same).

Anyone who has followed his track record, and his rhetoric, should not be surprised by his yea vote on QE. And, by the way, the Fed's own models don't show new easing measures affecting the stats for at least six to nine months out. I.e., if he (and the majority of voting FOMC members) were truly out to help the President, we'd have seen QE3 much earlier in the year. So those of you who think the election was just decided by a 200 point Dow rally, I think you're being a bit presumptive. I don't suspect the employment picture, or the economy in general gets measurably better before November 6. I.e., if Obama does pull it off, it won't be because of Bernanke. It will be because his brand of rhetoric speaks to today's majority (he has quite the knack for promising all the right things to all the right groups), and because Romney fails to make his case.

*Here's then member of the Federal Reserve's Board of Governors Ben Bernanke in a 2002 speech on deflation.

"The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."

"people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."

Note: These comments were made 4 years before his appointment to the Chair by GW Bush. If Republican policymakers want to scream foul (and I think they should), they should be screaming at one another. Bernanke is just being Bernanke...

Saturday, September 8, 2012

The Season for Cynicism - Or - A (potential) Whopper of a Week to Come

Your inbox is about to get a several-day reprieve. Myself, my wife, my dad, and my good friend and fishing partner Dan will be trying to fool a few salmon and halibut into mistaking something that's not their natural food for their natural food. If we're lucky, they won't be (lucky). When I'm fishing the ocean, unlike when I'm fly fishing a mountain stream, it's more about filling the freezer than it is the sport. I honestly (almost) don't care what it takes to fool my prey, as long as it's legal (although I still want them to have a fighting chance). You know - like politics: A pledge is dangled in front of the nose of an unsuspecting citizen, he bites, the hook is set and his vote is counted. The politician entirely doesn't care what it takes to fool his prey, as long as it works. And, sadly, the sea is full of (I'll say it nicely) 'innocent' voters. Forgive me, it's the season for cynicism (which I cast at both sides of the aisle btw).

Anyhow... In that I'm not sure how connected I'll be (although I should have a signal), and next week could be a whopper, I thought I'd get ahead of the major issues and [attempt to] allay any potential angst you may experience - just in case.

1. Mario Monti said this morning that he doesn't expect that Italy will access the ECB bond-buying plan announced last Thursday. The plan that inspired a 200 point rally in the Dow the same day. It'll be interesting to see how the market reacts to Monti's statement, if at all. On one hand, it might be a relief to traders - that Italy's leaders are [apparently] confident that they can contain their situation. On the other, it could be viewed as the Italians desperately trying not to impose upon themselves whatever conditions they'd endure should they apply for a bailout - which is a prerequisite to partaking in the ECB program. The fact that Monti, while not wanting the assistance, could accept it later (if need be), may leave traders simply yawning over this one. We'll see.

2. Next Wednesday the German courts are to rule on the constitutionality of the ESM (the bailout facility a country would have to access before receiving ECB assistance). I don't suspect the market would treat kindly anything but Germany ratifying the ESM.

3. Apple is set to unveil the iPhone 5 next Wednesday. If it's more than just skinnier, and I suspect it will be, it could send the stock higher. I mention this because Apple is a potential market-moving monster. Although next week should be all about Europe and the Fed.

4. The Fed meets Wednesday and Thursday. I believe open-ended QE3 is already baked into the market, and that traders expect it very soon. If however the Fed isn't ready to pull the trigger next week, Bernanke will have to keep the prospect very much alive, or he'll have some splanentodo if he hopes to avoid a sell off.

So what would you expect to hear from me should any of these events go awry, and the Dow takes that audio-commentary-triggering triple-digit decline? As you might imagine, you'd hear the usual "don't sweat it, you're allocated with the long-term in mind, and we'll be exploiting the opportunity, should it extend to your next rebalancing date*." And I'd surely (and oh so sincerely) be trying to convince you that the world will be much better off in the long-run if governments and central banks were to indeed back off and let nature run its course.

Have a great week!

*For more details on our strategy, read Our Strategy...

Friday, September 7, 2012

EPI, The Unions' Very Own Think-Tank - Or - Always check your source!

A 2001 Pew Research Center Survey showed 49% of Americans were in favor of the North American Free Trade Agreement (NAFTA). By 2010, supporters amounted to only 35% of those surveyed, while 44% were against it - with 55% believing NAFTA had produced a net loss in jobs, and only 8% believing it resulted in net new jobs. The 8%, by the way, had it right (or did they? See below*). Interestingly, Republicans (the "free market" party) exhibit a stronger loss in support than do Democrats. In 2010, a mere 28% of Republicans favored NAFTA. And, surprisingly (given their platform) only 24% of Tea Partiers thought NAFTA a good idea**.

Now you understand precisely why, as I suggest in earlier columns, protectionism is where left and right merge. Where survey/poll-inspired politicians, from both sides of the aisle, exploit this most pernicious misconception among voters.

*In verifying the above claim - that NAFTA created net new jobs - I discovered that stats compiled by the Economic Policy Institute (EPI) strongly suggest otherwise. The EPI claims that NAFTA resulted, not in new jobs, but in a whopping net loss of some 700,000. At first blush, I'm thinking "Wow, 700,000 (net) folks lost their jobs as a result of NAFTA. How can there be such disagreement on something that you would think is fairly estimable?" As it turns out, the EPI's number is based on what, in essence, [they say] would have been the new job number had the goods we imported been produced in America. They assume (I take it) that the quantity of a good we Americans purchased from say Mexico (because it was cheaper than it's facsimile made in America) would have been purchased every bit as aggressively (in spite of the higher price) were it made in America (and they do it convincingly with graphs). Now, given how odd, and rudimentary flawed, that argument is, I figured I better check out the EPI. And, sadly, what I discovered was the worst sort of cronyism. Why am I not surprised?

Let me just say that when the organizations providing the start-up (and ongoing) funding for your organization are the AFSCME, the United Auto Workers Union, the United Steel Workers Union, the United Mine Workers Union, the International Association of Machinists, the Communications Workers of America, the Service Employees International Union, and the United Food and Commercial Workers Union, you'll have more than a little incentive to bend your findings in a certain direction. Essentially, the unions created their very own think-tank, gave it an official-sounding name, and charged it with manufacturing statistical evidence that supports their specific objectives. Now if that doesn't convince you of the abject collusion at hand, consider that the President of the EPI is none other than Lawrence Mishel, a long-time member of the Democratic Socialists of America.

I understand where Mark Twain was coming from when he said "There are three kinds of lies: lies, damned lies, and statistics."

Here's the other side of the story (Washington Post 2008), which includes no hypothesizing. But (of course) considers only supporting data.

"With NAFTA, our economy remains the envy of the developed world. In fact, by most indicators, America has outperformed the average of the Group of Seven nations. Since 1993, our economy has grown 54 percent and more than 25 million net jobs have been created. In the 14 years before NAFTA, our nation's average unemployment rate was 7.1 percent. From 1994 to 2007, the average was 5.1 percent. U.S. manufacturing has grown at nearly 4 percent annually since NAFTA was enacted, nearly double that of the previous 14 years.

America is the world's No. 1 exporter, with $1.6 trillion in exports of goods and services last year; 2007 also marked our fourth consecutive year of double-digit export growth. Trade plays a significant role in our nation's economic growth, contributing 26 percent of the increase in real gross domestic product last year. NAFTA also accounted for a third of our overall goods exports in 2007. This trade benefits American workers who make the products we send abroad, American farmers who grow the agricultural exports, and American families and consumers who have more choices in our stores."

(In the interest of full disclosure; the author of the Washington Post article is Carlos Gutierrez, who served as the U.S. Commerce Secretary (appointed by GW Bush) from 2005 to 2009. Although NAFTA was established in 1994, under WJ Clinton.)

In the words of Milton Friedman:

"Complete free trade is not politically feasible. Why? Because it's only in the general interest and in no one's special interest. The benefits of a tariff are visible. [Union workers] can see they are "protected". The harm which a tariff does in invisible. It's spread widely. There are people who don't have jobs because of tariffs, but they don't know it."

And in the words of Dr. Friedman's idol Adam Smith:

"By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?"


"It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom."

Lastly, to capture the political flavor of my message: While campaigning to an Ohio audience in 2008 candidate Obama railed at the "1 million jobs lost to NAFTA". In 2010, he takes credit for what some say is a NAFTA clone, the

Thursday, September 6, 2012

I'll pass, but thanks anyway...

Mitt Romney promises to help me and my family. President Obama and Company promises to help me, my family, my union, my waistline, my kids' test scores, my fuel efficiency, my you-name-it. To both gentlemen I say; I'll pass, but thanks anyway. Why (they ask)?

Because I understand what you assume I don't: that you can't help me without hurting someone else in the process. What you would give me and my family you would have to take from someone else and his family. In fact, you can't help me without hurting my prospects for helping myself. For when you help me, and extract resources from those who are helping themselves, you weaken the very fabric of our economy. And, worst of all, you rob me of my ability to fend for myself. Not only by limiting my opportunities, but, worse yet, by instilling in me a welfare mindset.

Comfortable With Band Aids

Just listened to a couple of talking heads debate the efficacy of present Fed policy. Here's the tail-end.

Critic:Fed policy to this point has pushed asset prices higher but has had no impact on the economy.
Advocate: You can't say that. Because you can't prove the counterfactual - how bad things would have been without the Fed easing. But I bet you'll agree that without it the S&P 500 would not have stopped dropping at 666.
Critic: The system would have been cleansed without it.
Advocate: Yes, but at lower levels.

Save for the near-term economic impact, these men are basically in agreement. The system would be cleaner if the recession had been allowed to complete the job. However one is concerned with the healing of the economy, while the other is comfortable with band aids. Were they vying for the same office, whom, at this juncture, do you think would win? Yep. And that's a problem.

Market Commentary (audio)

In today's audio I speak entirely of the present short-term market environment. For what really matters read Our Strategy...

Click here for today's audio commentary...

Wednesday, September 5, 2012

Such is the cause of trillion dollar deficits...

Alas, avoiding the political rhetoric is virtually impossible. If you're a Californian however, you'll be spared much of the barrage of local ads that'll rain down upon say Ohioans or Floridians. Of course there'll be the national ads that'll interrupt your football game or Dancing With the Stars (if it's DWS season that is).

I caught a news clip this week that featured the President on the stump preaching his brand of policymaking to a most sympathetic union-member audience. I have to say, the man possesses oratory prowess like no televangelist I've ever seen. To the frenzied crowd he said, words to the effect, that he has stuck with them from the beginning and will continue to do so going forward. Now, to be fair, were he held to task, he'd no doubt claim to have been referring to the working class American, union member and non-union member alike. Yesterday I listened to a CNBC interview with the head of the AFLCIO. What struck me was his hailing the improvement in the U.S. economy "since we took over in 2008". I suppose I'll give him the benefit of the doubt (or not) and assume, his official capacity notwithstanding, that the "we" he referred to was he and fellow Democrats, as opposed to the unions. Although they (the unions) have taken over a noticeable chunk of GM since "they" took over the White House.

Now let's pick on the challenger. In his nomination acceptance speech, Mitt Romney, not possessing nearly the charisma of his opponent (but he did fine), said:

"President Obama promised to begin to slow the rise of the oceans and heal the planet. My promise is to help you and your family."

Did that inspire you? Well, quite frankly, it should have made you shutter, as should have Paul Ryan's "tax fairness" comment during his speech a couple nights earlier. Folks, what we don't need is government helping us and our families. That, or I should say the illusion/manipulation of "that", explains, to no small degree, what got us here in the first place. I know (assuming you're "conservative"), you'd say I'm taking his comment out of context. He really meant to say "my promise is to get government out of your way so you can help yourself and your family." But if that's what he meant to say, then he should have darn well said it. And not cater to the entitlement mentality that I fear is becoming rooted into the psyche of too many American families.

You may think the end (a political win) justifies the means. I disagree. Because when you promise the world, you're going to be compelled to deliver. Such is the cause of trillion dollar deficits...

Russ Roberts makes the (help you and your family) point, better than me, in this post on his fabulous blog

Today's TV Segment (video)

Tuesday, September 4, 2012

Our Strategy (message to clients)

Europe remains messy and China's growth has slowed markedly of late.The U.S. wrestles with an atypically slow recovery, is mired in class warfare, suffers a seemingly unbridgeable political divide, and is nearing the edge of a "fiscal cliff". And, oddly enough, U.S. stocks are positive on the year.

So what gives? Do stocks, in spite of it all, make fundamental sense - or have prices been bid up entirely on the anticipation of more aggressive global monetary easing? It depends on whom you talk to. I've been making the case all year that stocks, particularly cyclicals (tech, financials, etc.), all things considered, have been fundamentally attractive (that said, our clients' portfolios [in the aggregate] are currently weighted more to [economically] defensive sectors, such as consumer staples [stuff humans have to buy to live], than they've ever been). Others would tell you this year's gains have been little more than smoke and mirrors. That is, smoke signals coming from the Fed and mirrors of previous Fed-action-induced rallies.

So who has it right? For short-term traders, that may be an important question - for if the smoke-and-mirror crowd have it right, and the Fed and/or the ECB were to disappoint, this year's gains could be gone in a heartbeat. For long-term investors [who rebalance periodically] however, it entirely doesn't matter.

You see it's important to distinguish traders from investors. A trader looks to exploit day-to-day (at times minute-to-minute) pricing action - to capture even the minutest movement, in one direction or the other. The prospects for long-term earnings and dividend growth are the furthest things from the minds of traders. Sure, they play the earnings announcements, hoping to catch a buck or two (per share) bump (or drop if they're short), but never with the intent of owning a solid company and sharing in its long-term growth. In the mind of a trader, life, and often his/her career, is short. An investor, on the other hand, buys into the notion that, for the appropriate portion of his/her portfolio, owning the companies that will supply an ever-growing world population with the goods and services it wants and needs offers the best potential for achieving an above-inflation rate of return over time.

The act of rebalancing is simply the periodic (we recommend every six months for most) repositioning back to a target allocation, say 60% stocks for example. Thus, when stocks are on the rise, and the investor's exposure is therefore (when the rebalancing date rolls around) above target, he sells (back to target). And when stocks are declining, and the allocation is below target, he buys. Forever moving against the herd.

Therefore, if you're our client, and the fiscal cliff (for example) becomes reality (my the political ramifications, regardless of who wins the White House), and the market takes it in the chin, you'll be buying, while most people are selling (prices lower). If compromise is had, and the market rallies (assuming it's not already baked in), you'll be selling, while most people are buying (prices higher). The former, you might say, is Buffet-esque "buy when there's blood in the streets" mentality.

And yes, we do recommend tweaking sectors in an attempt to improve results at the margin. The current weighting to staples (for example) is an attempt to lessen volatility in the midst of extreme uncertainty. While I've been tempted (particularly in Q1) to recommend pulling back that position, we expect to keep it there until there's more visibility with regard to Europe and the other issues I outlined at the top. Our modest exposure to emerging markets is an attempt to take advantage of the prospects for growth where 85% of the world lives. And, make no mistake, the demographics and infrastructure needs of those markets make for exciting growth potential (extreme political and market volatility notwithstanding) in the years to come.

In the meantime I'll continue to impose my free-market bias upon you at every opportunity.

Stay tuned...

11 Too Good To Be Truisms

"Risky and Getting Riskier" reads the NY Times editorial. It looks as though a law banning the mass marketing of private stock offerings is about to be wiped from the books. And the paternalists are up in arms. Here's a snippet:

"Just what grandpa needed. Soon retirees and other investors will be barraged with advertisements for private stock offerings

Saturday, September 1, 2012

Too "Important" to Fail

Is it that when folks spend money, times are prosperous, or, is it that when times are prosperous, folks spend money? Does the spending create the prosperity, or does the prosperity inspire the spending?

It seems so simple, so obvious, when posed that way, right?

In the private sector, where individuals pursue their own objectives; hard work, competition, investment, productivity and innovation are engines of prosperity. When it makes sense - when they're confident - wise folks will spend (always within their means). When it doesn't, they won't. Not-wise folks, on the other hand, will spend beyond their means and suffer hard knocks. If they're lucky, no one will bail them out - lest they be robbed of the lesson,and remain not-wise folks.

Now, alas, in the public sector, where individual politicians pursue their own objectives, rents (in myriad forms) paid to special interests are the engines of campaign funding and votes (in bulk). When it makes sense, politicians will spend. When it doesn't, well, in the pursuit of their own objectives, it never doesn't. They will forever spend beyond their our means and only when they've run out of other people's money will they suffer hard knocks.

As for the corporate sector (which I'm compelled here to distinguish from the private sector), executives pursue their own objectives in two ways: One would be the intuitive - the competing for yours and my business. The other would be the helping the politician pursue his objectives, and, in the process, through some paid-for legislative act, gaining an edge over their competitors. And the more they can crony up to the politician the more egregious the risks they can take, for they'll have become too big (too important) to the politician to fail.

I.e., I suspect it ("too-big-to-fail") is less about risk to the system and more about the personal aspirations of politicians (*all), captured treasury secretaries (Paulson, Geithner) and Fed chairmen (Greenspan, Bernanke).

*Make no mistake, both sides of the aisle are equally culpable!