It's more than simply naivete...

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

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

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

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

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

Is it charity or economics?

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

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

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

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

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

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

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

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

Clearly, the economic logic rests on very shaky ground.

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

An Outrage!

Here's Paul Krugman in this morning's NY Times:

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

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

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

To be fair, Krugman does understand the unseen cost of high unemployment:

When willing workers endure forced idleness society as a whole suffers from the waste of their efforts and talents.

While some forever-aspiring politicians don't:

Let me say that unemployment insurance… is one of the biggest stimuluses (sic) to our economy. Economists will tell you, this money is spent quickly. It injects demand into the economy, and it’s job creating. It creates jobs faster than almost any other initiative you can name. -Nancy Pelosi

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

Remember, the U.S. government can't run out of cash (it can print the stuff)....

Now that's an outrage!

In the end it's very simple:

If you pay people not to work and tax them when they do, don’t be surprised if you get unemployment. -Milton Friedman

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

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

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

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

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

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

Today's TV Segment (video)

Never time the market!

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

For example: Tuesday delivered the third largest single-day point decline for the Dow this year, my job Wednesday was to explain it. And while my ego forever conjures up its theories, I---being the humble bloke I be---nonetheless scan the opinions of the world's finest traders, analysts, economists and gurus before presenting the reason du jour to the Central California community. Today, as a result of intense deliberation, I offered up my great revelation, "all of the above". Which would be all of the below:

"Rumor that Bernanke will step-down in 2014."
"Spain's GDP lower than expected."
"Structural downturn heading into a multi-quarter decline".
"It's all about disappointing earnings".
"It's all about guidance".
"Worries over the "Fiscal Cliff"".
"Too much QE".
"Not enough QE".
"Normal profit taking".
"Market following commodities lower".
"Market selling off on dollar rally".
"The S&P bumping against the bottom range of its 100-day moving average".

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

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

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

My point? Never time the market!

Partisanship is a most blinding affliction...

Paul Krugman is a special kind of economist. Stuff's true simply because he says so. Here he was (Thursday) asserting that the math behind raising revenue by limiting deductions, as opposed to raising rates, simply doesn't work:

Or take a subtler example, the insistence that any revenue increases should come from limiting deductions rather than from higher tax rates. The key thing to realize here is that the math just doesn’t work; there is, in fact, no way limits on deductions can raise as much revenue from the wealthy as you can get simply by letting the relevant parts of the Bush-era tax cuts expire. So any proposal to avoid a rate increase is, whatever its proponents may say, a proposal that we let the 1 percent off the hook and shift the burden, one way or another, to the middle class or the poor.

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

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

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

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

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

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

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

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

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

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

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

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