Utterly idiotic protectionism...

Wheat, rice, soybeans, poultry and dairy are among the top commodities America exports to consumers around the world. This has got to stop! This is the stuff we live on. Demand from other countries does nothing but make these essential items more expensive for us. And, come to think of it, we need all that technology we export as well. And all those services too. We can no longer allow our own greedy producers to tap foreign markets at our expense! Now there's an utterly idiotic statement, right? Absolutely!

We know that we trade dollars for the goods and services we desire from the other side of lines drawn on maps. A couple trillion a year of those dollars returns to purchase stuff---like wheat, rice, soybeans, poultry and dairy---produced on this side, the remainder returns as investment in assets. I.e., we get the stuff we want while creating business for U.S. exporters and opening markets for U.S. assets. Trade is a beautiful thing: it is the path to prosperity, and peace*. As consumers, and voters, breaking down protectionist trade barriers should be at the very top of our list of priorities.

So what would make trading natural gas any different? Unequivocally nothing!! There is no legitimate case, economic or otherwise, for restricting the sale of natural gas to other markets. Any attempts at such, as convincing as they may seem ("higher demand means a higher price"), are led by those (like America's Energy Alliance, a group formed by Dow Chemical, Alcoa and Nucor) whose execs believe, erroneously, that their companies benefit by restricting global opportunities for U.S. energy producers (I wonder how loud they'd scream if new export limits were placed on them). They don't seem to understand basic economics: that restricting the export of natural gas can only result in the industry, which is counting on the opening of trade routes, restricting production---which results in what? You got it; a higher price. That is, a higher price without all the economic growth (think jobs) that would result from free trade. Although I suspect that they clearly understand (and would trumpet if need be) that most basic concept when applied to the export of their respective commodities.

*"Greatly increased levels of international trade and foreign direct investment have raised the costs of conquest and shrunk its benefits. In today's open global trading system, it is almost always cheaper to acquire goods and raw materials by trade than to invade a country in order to steal them." The Human Security Report

*"When goods do not cross borders, soldiers will." Frederic Bastiat

It's, alas, meant to be spent...

I know, from your feedback, that many of you struggle with what you'd otherwise consider commonsense: that spending beyond means, when undertaken in seeming perpetuity, has to end badly. The struggle of course is not that such rudimentary logic applies to individuals or private institutions, but to what extent, if at all, it applies to governments. We who think it indeed applies to governments are labeled, by those who don't, everything from dogmatic to downright cruel.

The great general theory states, in essence, that we can consume our way to prosperity. That ramping up government spending during contractions is a must to offset the reduction in consumption. The great theorist, John Maynard Keynes, when pressed on the potential long-term problems that would evolve from such policy, quipped "in the long-run we're all dead".

To be fair, while Keynes indeed advocated deficit spending during recessions, he also advised, the above quip notwithstanding, that budgets should be brought back in line during expansions. We can analogize to a typical family experience: The oldest son, having a family of his own, loses his job. His parents, not wanting to see their grandkids wanting, step in and support him till he's back on his feet. The young family, by the grandparents' grace, goes right on consuming. Their son ultimately lands a new job and upon receipt of his first paycheck calls mom and dad and says "thanks, I'll somehow pay you back, love you!" The folks, no longer having to keep their son afloat, can now plan the float trip across the Mediterranean that they put off to help junior and his family. Of course my analogy doesn't really fit: Because the folks actually had the money---they didn't have to borrow to help their son---although, prudent as they were (which is why they had the money), they delayed the cruise so as to keep their fiscal house in order. That's not quite reality when we're talking government spending.

A somewhat more apt analogy might be one where the folks are barely getting by themselves, and, by the grace of their good credit rating, borrow to help their son. They do it out of obligation, yet they pray that somehow their son, once back in the workforce, will earn enough, and be frugal enough, to someday pay them back. The problem with my somewhat more apt analogy is that frugality is not what government would have the recipients of its largess practice---quite the opposite in fact. A la Keynes, it's meant to be spent.

Of course you don't need a PhD in economics to determine that when we're talking about families the latter example is a recipe for fiscal disaster. So why should we believe that it's any different for governments? Well, frankly---as present-day Europe strongly suggests---we shouldn't. That said, there are many who hold PhDs in economics who would have you believe that it is indeed different for governments. Here's one---he's a Nobel laureate to boot---making that case.

 Here's a rebuttal. Here's another.

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Foreseeable Cyprus...

So why is the stock market holding up so well (for the moment) amid a potential Lehman event (Cyprus) in Europe?

I suspect, combined with compelling fundamentals, it's simply a case of been-there-done-that. Recent history strongly suggests that, while it may go down to the wire, political motivation will inspire all the band-aiding and can-kicking the market could ever hope for.

That said, make no mistake, whatever the catalyst, stocks take hits now and again. The fundamentals, as I said, are inspiring, but don't let that lull you into thinking it's nowhere but up from here---that's simply not reality. And I suspect the next correction, we'll come to know in retrospect, will come from a black swan (an unforeseeable event) swooping in from out of the blue. Thus, foreseeable Cyprus, while it can yet create some real short-term havoc, likely won't be the catalyst for the next major, extended, decline in stocks.

The great growing machine...

Here's an excerpt from Harold Meyerson's Washington Post Op-Ed this morning:

In short, the economy is working for our economic elites. The massive changes they would have to make to investment strategies and the division of corporate revenue so that the economy worked for the majority of the American people are nowhere on the horizon. The great growth machine that once was the U.S. private sector ain’t what it used to be — which is one reason each recession since 1990 has been longer, deeper and more in­trac­table than the last. That’s the new economic reality in this country, and that’s what the budget of the Congressional Progressive Caucus responds to. It’s not that liberals have been prompted to move leftward through the readings of ancient socialist gospels or by smoking some stash left over from the ’60s. It’s that the economy has reached a dismal stability far short of its full employment potential or renewing the promise of widespread prosperity, and government investment is required to make up the difference. If anyone is smoking something, it is conservatives who foresee a rebirth of prosperity if only the private sector is left alone.

Here's my take:

The great growing machine that is the U.S. public sector ain't what it used to be either. It has morphed into a leviathan that rains down (its influence) upon the U.S. economy like never before --- which is the reason each recession since 1990 has been longer, deeper and more intractable than the last. That's the new economic reality in this country. The politician, and his advisors (reared in the politically-expedient Keynesian school of economics) know no other strategy than to throw money at problems created by throwing money at problems.

I'm hoping against hope that it's not only conservatives who understand that a rebirth of prosperity is only possible to the extent the private sector is left alone. I'm hoping that people will come to understand what corporate execs understand; that, cronyism notwithstanding, the more government intervenes into the private sector the more distorted the pricing of goods and services, and the more difficult/uncertain the forward planning---which breeds apprehension, which results in record cash on balance sheets and a strong reluctance to invest/expand/hire. Remember, if you're old enough, the gas lines in the '70s. Remember, you are old enough, the real estate bubble in the 2000s. Remember the rise, then crash, of auto sales that coincided with "Cash for Clunkers". Remember the rise, then crash, of home sales that coincided with the "Homebuyers Tax Credit". Pay attention to the education/student loan bubble we're currently experiencing. Pay attention to the Fed's pricing of today's bond market. I could write volumes on where government price-fixing, of whatever mode, has produced unsavory results.

Here's another snippet from Mr. Meyerson's article:

The U.S. corporations that make up the Standard & Poor’s index of the 500 largest publicly traded companies get almost half their revenue from sales abroad, according to a 2011 S&P analysis, and, despite all the hoopla about bringing manufacturing back to the States, much of their production is going to remain abroad. The rise of machines has, we all know, taken its toll on employment too. U.S. corporations are sitting on $1.7?trillion in cash, with share values and profits that render most of these businesses’ leaders happy campers. Even if the U.S. economy continues to fall far short of full employment, and even if the rate of workforce participation continues to decline, these businesses can still sell their products all over the world. Unlike in the 1930s, the shortfall in domestic consumption does not present them with a crisis but with perhaps nothing worse than a missed opportunity.

Here's my take:

Mr. Meyerson, like so many surface dwellers, suffers from extreme Neo-Luddism, and a most pernicious affliction called protectionism. The "rise of machines", from automobiles to computers, and the expansion into world markets have been nothing short of miraculous in terms of job growth in this country. To imagine a world where we couldn't reach across borders and/or where we didn't aggressively exploit innovation wherever we can create it, is to imagine a world of utter stagnation.

Oh, by the way, I typed this essay on the iPad I bought at the bustling, heavily staffed with U.S. workers, Best Buy store because of the wait at the bustling, heavily staffed with U.S workers, Apple Store was too long due to customers cramming in to spend their wages on affordable (thanks to Apple's international reach) technology. And that's just the tip of the iceberg when we consider the economic, right here at home, benefits resulting from all the stuff the consumer can do with that technology.

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Waste of air time... (originally posted 3/12/13)

Originally posted March 12, 2013 (changed web hosts and back ups only through 2/28 were transferred)

One day last week I found myself tapping the TV mute button so as to concentrate on the afternoon’s essay.  Plus, CNBC was featuring its daily technical analysts debate, which I view as an utter waste of airtime.  This is where two geniuses argue over whether the market, or a given stock or sector, is going from here based on some combination of chart lines tracking any number of factors.  On any given day I can tell, with the sound off even, who’s bullish and who’s bearish.  Being that we’ve been living in the midst of rising stock prices, these days the bears are typically flush in the face and dramatically more expressive than their opponents.  The bulls of course will sport the widest of grins.

This morning’s commentary from the floor of the New York Stock Exchange was all about the S&P 500 breaking above its, I think, 50-day (or maybe it was its 200-day) moving average.  And the last time it did such, in such fashion—supposedly a few weeks ago—that index, according to the gentleman on the floor, stalled for a few days then catapulted to a 5-year high.  And, no kidding, he, and the strategist at the desk, were taking this phenomenon very very seriously.

How desperate we are to know the unknowable.  So much so that vast amounts of time and money are forever spent hypothesizing, testing, articulating and manipulating the very few measurable factors, in a world of countless unmeasurable factors, that might motivate a buyer and a seller to agree on the price of a share of stock.  So much so that some would have us believe that they can foretell what’s to come when the lines that draw today’s mountainous stock charts resemble the lines that charted the markets of old.  For certainly those mirrored lines can’t be pure coincidence—they indeed must portend a near-term trend, right?  Well, emphatically, wrong!

The simple fact that, daily, CNBC is able to pit two technical analysts against one another proves conclusively that the charts of old have virtually no predictive value.  I.e., two individuals—who have spent untold sums on the schooling it takes to justify an appearance on the world’s #1 financial network—looking at the same charts, yet coming to different conclusions, means that the S&P 500 busting through some moving average signals nothing more than either an upward, downward or sideways near-term market trend.  In other words, it signals zilch!

We can easily apply Hayek’s view of economics —“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”— to the market:

The market forever demonstrates to men how little they really know about what they imagine they can predict.

And of course it’s that unpredictability that allows the stock market to function.  I.e., every doom-saying seller needs a bleary-eyed buyer…

 

Public Swindlers (originally posted 3/10/13)

Originally posted March 10, 2013 (changed web hosts and back ups only through 2/28 were transferred)

With midterms coming up next year, and the general election two years later, the timing couldn’t be better for the politicians who've been blessed to find themselves at the forefront of the tax-reform effort.  Per this morning’s Washington Post article, As momentum builds toward tax reform, lobbyists prepare for a fight, we’re talking the granddaddy of all opportunities to raise campaign funds and buy votes en masse.  Just ask Dave Camp (R-Mich), Max Baucus (D-Mont), the chairmen of the House Ways and Means Committee and Senate Finance Committee — who have vowed to pursue a tax code rewrite this year — and ranking members of their posse, Orrin Hatch (R-Utah) and Sander Levin (D-Mich); the four of them have raked in some $5.6 million recently from corporations looking for a little love when it’s time to redistribute the goodies.  Although their aides did say “the political contributions do not affect policy decisions and don’t make an ounce of difference” and said the lawmakers’ decisions are influenced only by “the interests of their constituents.”  OOOOOOkay…

It’s also a boon to “retired” politicians like Rudy Giuliani (R), Trent Lott (R) and John Breaux (D), who left public service to become public swindlers.  Or, more accurately, remained public swindlers but now get to do their thing in more straight-forward fashion and get paid big bucks in the process.

Folks, I could spend the day writing on the ills of lobbying, on how politicians take us for utter fools—they would truly have us believe that “political contributions do not affect policy decisions”.  But I’ll simply cut to the chase: The more government grows, the more influence it has over the economy—over our lives—the more it pays corporations to allocate their resources toward competing for the affections of the politician and away from competing for our business in the marketplace.

True tax simplification would indeed, after the dust settles, benefit our nation in ways you can’t imagine. Or maybe I should say in ways you shouldn't waste your time imagining.  For the elimination of all (yes all) subsidies, corporate and consumer, and going with a simple flat tax would dramatically shrink the influence of government and, consequently, kill the coffers of campaigns.  And, please, if you happen to pledge allegiance to either of the two major parties, don’t think for a minute that yours is out to promote limited government and competitive markets—notice the Rs and the Ds following the names of the players.  And, ah shoot, I better stop here or I will spend the day on this topic….

 

Consuming Our Way to Prosperity is Macro Folly, by John Papola (originally posted 3/6/13)

Originally posted March 6, 2013 (changed web hosts and back ups only through 2/28 were transferred)

Here’s a snippet from an excellent piece by John Papola.  Be sure to read  (it begins below the video):

Good macroeconomics should be focused on this coordination among value-adding producers and be on the lookout for financial disruptions and mismatches between the supply and demand for their medium of exchange: money itself.  This has been the classical focus of macroeconomics from David Hume and John Stuart Mill through Friedrich Hayek and Milton Friedman.

For most of human history, ordinary people had to spend their lives growing food.  Today, we have many billions more people on the planet.  And yet food is cheaper, better and of greater variety than ever before.  Still, almost nobody works in agriculture . We didn’t create this wealthy, amazing world by eating.  We did it by saving our seed corn, investing and ultimately inventing our way out of farming jobs. Thank heavens we did.

There are important lessons for public policy that come from these classical insights.  Any program which accelerates the consumption of value, or worse, the destruction of value, ultimately make our society poorer.  Despite what Keynes and his modern followers claim, wars, natural disasters, terrorist attacks, faked alien invasions or programs that encourage us to destroy our used cars — all make us poorer. These schemes reduce the amount of valuable goods and services available for society.

Some may consider unemployment benefits to be a necessary policy on humanitarian grounds, but they by no means “stimulate” the economy.  The recipient, after all, is consuming without producing any value for others.  Disincentives for people to be productive, which have exploded in recent years, not only reduce employment, but reduce output and growth as well.  This last point used to be widely believed by economists, including the immensely popular and polarizing economist, Paul Krugman, whose own 2009 textbook blamed extended unemployment benefits as one of the main reasons for decades of European stagnation and high “structural” unemployment. Now, I fear that a decade of Keynesian macro follies has brought Euro-sclerosis to America.

Savings and investment are the true engines of economic growth.  When successful, they increase the total amount of valuable goods and services for people to enjoy.  They build a better mousetrap and allow us to do more with less.  A growing economy is a growing supply of goods and services being exchanged between productive people.

 

 

One profoundly clueless character... (originally posted 3/9/13)

Originally posted March 9, 2013 (changed web hosts and back ups only through 2/28 were transferred).

Paul Krugman, as in the final sentence of this week’s Op-Ed, is forever quick to call those who don’t agree with his economic assertions clueless.  Well, if a Nobel laureate economist wants to call someone economically-clueless, I suppose he’s been awarded that privilege.  However, in last week’s article, he ventures into areas (the market, and corporate budget management) that, clearly, lie beyond the bounds of his expertise—as his displayed cluelessness attests.

 He states;

The interest-rate story is fairly simple . As some of us have been trying to explain for four years and more, the financial crisis and the bursting of the housing bubble created a situation in which almost all of the economy’s major players are simultaneously trying to pay down debt by spending less than their income.  Since my spending is your income and your spending is my income, this means a deeply depressed economy.  It also means low interest rates, because another way to look at our situation is, to put it loosely, that right now everyone wants to save and nobody wants to invest.  So we’re awash in desired savings with no place to go, and those excess savings are driving down borrowing costs.

 Under these conditions, of course, the government should ignore its short-run deficit and ramp up spending to support the economy.  Unfortunately, policy makers have been intimidated by those false priests, who have convinced them that they must pursue austerity or face the wrath of the invisible market gods.

 Meanwhile, about the stock market: Stocks are high, in part, because bond yields are so low, and investors have to put their money somewhere.  It’s also true, however, that while the economy remains deeply depressed, corporate profits have staged a strong recovery.  And that’s a bad thing!  Not only are workers failing to share in the fruits of their own rising productivity, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work.

Oh my, where to begin?  I guess I’ll start at the start: The interest-rate story, I concede, is indeed fairly simple. Rates do decline during recessions (although we’re no longer in a recession) because, of course (leaving out the Fed for the moment), demand for loans declines, while, as Krugman points out, liquidity rises.  I’ll add that bonds are considered safe, and investors tend to want safe during recessions (although we’re no longer in a recession)—the heightened demand for bonds drives up their prices and down their yields.

He says “everyone wants to save and nobody wants to invest.”  Now hmm…I thought the Dow just hit an all-time high.  And nobody’s investing??  Perhaps he’s referring only to corporations not investing their cash, which they’re not, much.

He says that “corporate profits have staged a strong recovery.”  But I thought “my spending is your income and your spending is my income.”  And that since the (he states in pure Keynesian fashion) “players” are “spending less than their income” (God forbid), “this means a deeply depressed economy”.  But if nobody’s spending (which, as you’ll see in a second, is pure bunk), how is it that “corporate profits have staged a strong recovery”?  Hmm… I wonder if the overall weak economy hasn’t had more to do with lack of business investment, than it has lack of spending—particularly since, so contrary to his claim, consumer spending hit an all-time in 2012.  And his comment that recovering corporate profits is a “bad thing” literally blows my mind!  Like workers would somehow be better off if corporate profits weren’t recovering?  Ludicrous!

Again, he says that the “economy’s major players are simultaneously trying to pay down debt while spending less of their income”.  I wonder if “major players” includes corporations?  I assume so.  Yet, I repeat, “corporate profits have staged a strong recovery.”  Hmm… Sounds like, since “corporate profits have staged a strong recovery”, paying down debt and spending less income are okay things to do.  Of course that’s not what Washington, a no doubt “major player”, is doing, right?  I mean it’s borrowing a $trillion extra a year (and he mentions “austerity”??). And that’s a $trillion a year that all economic players are going to have pay back.  Hmm…And why is that good for the economy?  Oh that’s right, it’s current spending…

 He says corporations see no reason to put dollars to work because of weak consumer demand (???? again, record consumer spending last year).  Hmm…That’s not what I’m seeing.  Corporations, those who run them that is, would enthusiastically put dollars to work in all manner of R&D (creating all sorts of jobs) if they felt certain that some new reg or tax hike wasn’t lurking around the next economic bend.  Of course, navigating bends in the economic cycle they can do—they’ve proved it of late.  But the prospects of paying the bills of thriftless politicians, and paying the price of clueless committees, urged on by clueless economists, attempting to reengineer the world with new sets of rules (as they tend to do in their efforts to deflect attention during downturns) inspires the utmost corporate prudence.

 As for why stocks have been rising; yeah, low bond yields don’t hurt.  But, believe you me, without those corporate profits, buyers wouldn’t be a coming to bid those share prices higher for those shareholders who, without those corporate profits, wouldn’t be so reluctant to sell.  And back to why interest rates remain so low; any actor who would proffer an explanation without the slightest mention of the Fed buying $85 billion a month worth of bonds, is either just that, an actor, or one profoundly clueless character.

 

Another thought on the all-time high... (originally posted 3/6/13)

 

Originally posted March 6, 2013 (changed web hosts and back ups only through 2/28 were transferred)

As I said yesterday, the share prices of the 30 stocks that comprise the Dow have moved to a level that assign it a number higher than it’s ever been.  Suggesting that the US market, which is comprised of roughly 15,000 stocks (there are 63,000 publicly traded companies worldwide btw), probably isn't best represented by an index tracking 0.20% of all the stocks traded in the U.S.

In fact, if we want to zero in a bit, and consider the major sectors of the U.S. economy (or I should say, the stocks that comprise the indices that track those sectors), 6 of the top 10 (financials, telecom, materials, utilities, industrials and energy) are still underwater from the 2007 peak.

My point?  Well, if you’re struggling with being in the market when the Dow’s at an all-time high (as I suspect investors were when it hit 200, then 500, then 1,000, then 5,000, then 10,000 and so on), there’s a much bigger picture (like the 62,970 other stocks in the world) to consider.

Am I predicting new records for as far as the eye can see?  Of course I am!  With giant black swans (impossible to predict events) creating nightmarish bear markets (that smart long-term investors will buy/rebalance into) from time to time along the way.

 

So Now What? (originally posted 3/5/13)

Originally posted March 5, 2013 (changed web hosts and back ups only through 2/28 were transferred)

So the market just hit its all-time high!  Uh, scratch that.  The share prices of the thirty stocks that comprise the Dow Jones Industrial Average (the Dow), each assigned a different weighting in the calculation that assigns a number to that average, have risen to the point where the Dow’s number is higher than it’s ever been.  Wow!  So now what?

 Well, stock prices will continue to move higher in the short-run if buyers continue to bring their cash to the market and current owners are reluctant to let go of their shares at yesterday’s prices.  I could offer a dozen reasons why that may continue for months to come.  On the other hand, stocks could halt their ascent and decline if sellers come to the market to unload their shares and buyers aren’t willing to pay yesterday’s prices.  And I could offer a dozen reasons why that may occur as well.

 As for the long-run (decades), stocks will go up and stocks will go down.  They’ll trend higher, however, if companies continue to produce goods and services that their customers (the world wide) can continue to purchase at prices that yield a nice profit. And that those profits are utilized to expand their enterprises, improve their product lines and create the next generation of stuffs that turn people on and change the world.  On the other hand, they’ll trend lower if somehow the power over too much of those profits divert, through over-taxation/regulation, to those who believe an economy is something that can be centrally planned, and/or politicians who live to accomplish their—or their advisors’—view of social justice.  As concerned as you may be with the latter, I’m thinking the former—present trend in some parts of the world notwithstanding—remains the likeliest scenario.

If Keynes were still with us??

I tell ya, this morning's Washington Post Op-Ed by E.J. Dionne is one piece of work---the malarkey is so thick you can cut with a knife. Partisanship, as I stated here, is a most blinding affliction. But rather than penning a lengthy open letter to Mr. Dionne, I'll simply address one of his points. My counterpoint should be instructive to those who, like Mr. Dionne, love to invoke the late John Maynard Keynes when justifying present fiscal policy. He states:

Through it all, Keynesian economics kept our economy humming while widely shared prosperity created the sense of national solidarity that a world role required.

So, if Mr. Dionne is right, if indeed Keynesianism kept our economy humming from WWII on (not my position by the way), why would he advocate abandoning it at a time when our economy is anything but humming?

He wrote;

And do conservatives who say they favor American greatness think they are strengthening our nation and its ability to shape events abroad with an ongoing budget stalemate created by their refusal to reach agreement with President Obama on a deal that combines spending cuts and new taxes? Would they rather waste the next three years than make any further concessions to a president the voters just reelected?

Here was Keynes---from The Collected Writings of John Maynard Keynes (London: Macmillan, Cambridge University Press, 1972)---on how wealth creation (as opposed to wealth taxation) might increase the national income, and how "a reduction of taxation will run a better chance than an increase of balancing the budget." In other words, here was Keynes himself in stark opposition to the sorts of proposals recently put forth by the Obama administration:

When, on the contrary, I show, a little elaborately, as in the ensuing chapter, that to create wealth will increase the national income and that a large proportion of any increase in the national income will accrue to an Exchequer, amongst whose largest outgoings is the payment of incomes to those who are unemployed and whose receipts are a proportion of the incomes of those who are occupied...

Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more--and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

Interesting! So Keynes clearly would've counseled against raising taxes during the slowest recovery on record. Of course he would've been against government spending cuts as well. He maintained that the boom, not the bust, was the time to cut spending. The problem being, as we've witnessed, that legitimate spending cuts are anathema to career crony-ridden politicians, regardless of whether the economy is booming or busting, or whether they call themselves Keynesians. 

Better, therefore, to spend within our means, regardless...

Will tiny Cyprus force a correction? Who cares?

"The stock market could really use a good sell-off" I told a friend/client last Friday. He replied "absolutely!" And I swear he meant it. Yeah, I know, the individual investor has been MIA this go round (according to mutual fund in/outflows), and has therefore missed a very nice run in stocks---but, I’m happy to report, the individual investors I know pretty much get it. Of course most of the individual investors I know are my clients, and while they may miss (ignore) many of my daily missives, when the market's taking a hit, my blog takes hits galore. Which means folks need perspective when things get wacky.

Well, just when it almost seemed safe for the individual investor (not the one I know) to get back in the water, something happened in the water just 40 miles south of Turkey. There's this little speck on the map where about a million folks live, where they produce about $24 billion a year in goods and services, where they do their business in Euros, and where, come Tuesday, every one of its citizens with a bank account will involuntarily contribute (be robbed of) 7% to 10% of his/her balance toward bailing out their country. Yes, Cyprus is in a bit of a fix. And, consequently, as I type, the Euro is tanking, Asian stock markets are off around 2% across the board (that would be 280 Dow points here), and Dow futures are trading down about 150.

And why would such an event---to secure a bailout the size of roughly a day and a half of U.S. government spending---send global markets into a tizzy? Good question! I'll answer in four easy bullet points:

• Because folks who've been in the market awhile — and who haven't been paying attention to how effective the market has been at forcing politicians to kick cans down roads — have some nice short-term gains they'd like to preserve.

• Because folks in other struggling Euro zone nations will surely close their bank accounts in fear that it could happen to them. And that would not bode well on a number of fronts. Not the least of which being the prices of those nations' sovereign debt going forward.

• Because (on another front), given the obvious, a run (mass depositor exodus) on Euro zone banks would no doubt spark a sharp sell-off in equity markets.

• Because a tanking Euro means a rallying dollar, which means U.S. exports become more expensive, which means multinational companies' earnings could suffer. Never mind that a stronger U.S. dollar means a stronger U.S. consumer.

Now I could try and soothe your nerves by telling you that soothing words are on the way from the ECB, that what happens in Cyprus stays in Cyprus, that the Troika (the European Central Bank, the European Union and the International Monetary Fund) have worked too hard, and, they believe (I'm a skeptic), come too far to allow tiny Cyprus (although, of course, the “Troika” is setting the terms) to derail their plans. But I don't want to. All I want to tell you is, that, in spite of the fact that Alan Greenspan thinks stocks (as of last Friday) are cheap---I know, I haven't been a fan, but he did coin the phrase "irrational exuberance" during the late 90s---the healthiest thing right about now, whatever the catalyst, would be a sell-off of more than a couple dozen Dow points. You see sellers gotta win every now and again---it keeps fresh cash on the sidelines. And, from what I gather, it's not just the individual investor who has missed the party---there's a contingent of hurting hedge (and mutual) fund managers out there who've been praying for that 5+% correction so they can get their clients' cash to work and, hopefully, save their careers.

It'll be interesting to see how long, or how deep, the correction (if that's what's presently in store) runs before a new rush of cash hits the market.

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