Last week on his show, Jim Cramer unveiled his "All-Pro Safety" picks, which focus on yield. As of the airing, these stocks had a collective dividend yield of 7.1%, and, of course, were selected on the premise that the dividends were safe. Here's the list:
BMY
GXP
KMP
NAT
VZ
Notably absent from this list is MO - perhaps Cramer has an aversion to tobacco, but I wasn't aware of that. A few things to thing about regarding this list. First, let's hope the incoming administration isn't stupid enough to raise the tax on dividends. Second, if inflation picks up substantially, the real value of that dividend is going to get whacked hard, though you would hope that this would be offset by increasing share prices (yields are high because prices are low, inflation should be an indicator, at least at first, of an economy picking up steam).
Finally, be aware that I am not a registered investment advisor, am not qualified to give investment advice, and do not own a crystal ball. I am just conveying Cramer's thoughts, which I found interesting. After all, if you want to flee to safety, you can opt for a 3-month at .01%, or a 7.1% yield that probably isn't extremely less safe.
Monday, December 15, 2008
Saturday, December 13, 2008
"Today's History Lesson"
"With the end of the Terror, Talleyrand had been rehabilitated and returned to France. Hamilton knew that he was avaricious and regarded public office as a means of obtaining money. The cynical Frenchman once told a mutual friend that 'he found it very strange that a man of his [Hamilton's] quality, blessed with such outstanding gifts, should resign a ministry in order to return to the practice of law and give as his reason that as a minister he did not earn enough to bring up his eight children.' After Hamilton returned to New York, Talleyrand was en route to a dinner party one night when he glimpsed Hamilton toiling by candlelight in his law office. 'I have seen a man who made the fortune of a nation laboring all night to support his family,' he said, shocked. After becoming French foreign minister in July 1797, he rejoiced at the plunder placed at his fingertips. 'I'll hold the job,' he confided to a friend. 'I have to make an immense fortune out of it, a really immense fortune.' He proceeded to scoop up an estimated thirteen to fourteen million francs during his first two years as foreign minister alone."
Ron Chernow, "Alexander Hamilton", pp.548-49.
Obviously, I am in the process of reading Mr. Chernow's outstanding biography of the outstanding personage on the $10 bill (and making darn little progress!). The above (timely!) quote is from a passage describing an incident during the John Adams administration, in which the French foreign minister gave our new nation great insult by his refusal to negotiate in good faith relative to French privateering predation upon American shipping. Charles Maurice de Talleyrand-Perigord, of course, later becoming infamous for his role in the Louisiana Purchase ("You have made a noble bargain for yourselves and I suppose you will make the most of it.").
America's "Quasi-War" with France, though mostly forgotten, is instructive as a reminder of the intense partisan passions surrounding the question of which powerful wagon our fledgling nation should hitch itself to: France (the Republicans led by Jefferson), or Great Britain (the Federalists, best exemplified by Hamilton). In any case, both euro powers viewed our new nation as a rich cow to be freely milked, hence Talleyrand's grotesquely insulting terms for peace.
This period is also instructive in that it shows how different the realities of the present are from those of the past. Specifically, it is amazing how greatly the politics of the late eighteenth and early nineteenth centuries were dominated by a near-acceptance that our affairs would either be peacefully subsumed, or enveloped through conquest, by either Great Britain or France (see, e.g., 1812, War Of). Though many at the time did foresee America becoming the power it has, even the most optimistic did not see this as inevitable or a foregone conclusion.
Ron Chernow, "Alexander Hamilton", pp.548-49.
Obviously, I am in the process of reading Mr. Chernow's outstanding biography of the outstanding personage on the $10 bill (and making darn little progress!). The above (timely!) quote is from a passage describing an incident during the John Adams administration, in which the French foreign minister gave our new nation great insult by his refusal to negotiate in good faith relative to French privateering predation upon American shipping. Charles Maurice de Talleyrand-Perigord, of course, later becoming infamous for his role in the Louisiana Purchase ("You have made a noble bargain for yourselves and I suppose you will make the most of it.").
America's "Quasi-War" with France, though mostly forgotten, is instructive as a reminder of the intense partisan passions surrounding the question of which powerful wagon our fledgling nation should hitch itself to: France (the Republicans led by Jefferson), or Great Britain (the Federalists, best exemplified by Hamilton). In any case, both euro powers viewed our new nation as a rich cow to be freely milked, hence Talleyrand's grotesquely insulting terms for peace.
This period is also instructive in that it shows how different the realities of the present are from those of the past. Specifically, it is amazing how greatly the politics of the late eighteenth and early nineteenth centuries were dominated by a near-acceptance that our affairs would either be peacefully subsumed, or enveloped through conquest, by either Great Britain or France (see, e.g., 1812, War Of). Though many at the time did foresee America becoming the power it has, even the most optimistic did not see this as inevitable or a foregone conclusion.
Wednesday, December 10, 2008
More Scary Charts
Yesterday Carter Worth, Chief Technical Analyst at Oppenheimer, appeared on Fast Money to discuss recent stock market action. Notably, he presented a 30-year chart of the S&P a la Louise Yamada. Although not nearly as negative, he acknowledged the obvious point that the S&P is bouncing along very long-term support, and that failure to hold here opens the possibility of substantial further declines.
Mr. Worth noted that the sideways trending is consistent with his training and experience. These issues (will support hold or not) don't tend to resolve themselves in short order. He expects much more trading within recent ranges before this matter resolves itself.
Mr. Worth noted that the sideways trending is consistent with his training and experience. These issues (will support hold or not) don't tend to resolve themselves in short order. He expects much more trading within recent ranges before this matter resolves itself.
Tuesday, December 09, 2008
Governors Against State Bailouts
Last week Governors Rick Perry (Texas) and Mark Sanford (South Carolina) offered some very interesting thoughts in a WSJ piece they authored entitled "Governors Against State Bailouts". Helpfully, the governors pointed out that "every penny would have to be borrowed" to prop up ailing state governments. They caution that in the usual rush to "do something" (in this case, regarding the various fiscal crises among state governments), it would be wise to first "do no (more) harm to our country's finances."
This is a critical point: by diverting scarce resources (by borrowing) from economic best uses, and directing them to governmental entities whose governing models are clearly failures, the feds will likely accomplish little other than perpetuating fiscal doldrums, irresponsibility, and slow growth.
As an alternative, Governors Perry and Sanford suggest a model they have in fact successfully utilized - "improving soil conditions for business by cutting red tape, reforming our legal system and our worker's compensation system." Andrew Jackson called this approach "reform, retrenchment, and economy". I would call it a nod to Hauser's Law - supply-side reforms geared toward raising growth rates, and not tax rates, restores fiscal health, and beget a virtuous cycle of continuing growth.
This is a critical point: by diverting scarce resources (by borrowing) from economic best uses, and directing them to governmental entities whose governing models are clearly failures, the feds will likely accomplish little other than perpetuating fiscal doldrums, irresponsibility, and slow growth.
As an alternative, Governors Perry and Sanford suggest a model they have in fact successfully utilized - "improving soil conditions for business by cutting red tape, reforming our legal system and our worker's compensation system." Andrew Jackson called this approach "reform, retrenchment, and economy". I would call it a nod to Hauser's Law - supply-side reforms geared toward raising growth rates, and not tax rates, restores fiscal health, and beget a virtuous cycle of continuing growth.
Today's Economics Lesson
"The Mirage of Inflation"
"The more knowing inflationists recognize that any substantial increase in the quantity of money will reduce the purchasing power of each additional monetary unit - in other words, that it will lead to an increase in commodity prices. But this does not disturb them. On the contrary, it is precisely why they want the inflation. Some of them argue that this result will improve the position of poor debtors (the U.S. government?) as compared with rich creditors (owners of government debt?). Others think it will stimulate exports and discourage imports (a China strategy of the Bush Administration?). Still others think it is an essential measure to cure a depression, to "start industry going again,"(bailouts?) and to achieve "full employment (infrastructure spending?)...
"So inflation... may indeed bring benefits for a short time to favored groups, but only at the expense of others... It leads to the overexpansion of some industries at the expense of others. This involves a misapplication and waste of capital (throwing money at GM). When the inflation collapes, or is brought to a halt, the misdirected capital investment - whether in the form of machines, factories, or office buildings - cannot yield an adequate return and loses the greater part of its value. Nor is it possible to bring inflation to a smooth and gentle stop, and so avert a subsequent depression (1981-1982)...
"Yet the ardor for inflation never dies... Inflation is the auto-suggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation. It is the opium of the people. And this is precisely its political function. It is because inflation confuses everything that it is so consistently resorted to by our modern "planned economy" governments (Washington to take over Detroit, the housing industry, etc.)...
"Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow (hence Jim Cramer doesn't care - he'll just profit from the game while it lasts, and tough luck to anyone not as smart as he is). It discourages all prudence and thrift... It often makes it more profitable to speculate than to produce (housing bubble anyone?)... Its inexcusable injustices drive men toward desperate remedies (Obama). It plants the seeds of fascism and communism (not a problem for Obama?). It leads men to demand totalitarian controls (wage and price controls, nationalized health care). It ends invariably in bitter disillusion and collapse (unless a Ronald Reagan appears)."
Henry Hazlitt, "Economics in One Lesson"
"The more knowing inflationists recognize that any substantial increase in the quantity of money will reduce the purchasing power of each additional monetary unit - in other words, that it will lead to an increase in commodity prices. But this does not disturb them. On the contrary, it is precisely why they want the inflation. Some of them argue that this result will improve the position of poor debtors (the U.S. government?) as compared with rich creditors (owners of government debt?). Others think it will stimulate exports and discourage imports (a China strategy of the Bush Administration?). Still others think it is an essential measure to cure a depression, to "start industry going again,"(bailouts?) and to achieve "full employment (infrastructure spending?)...
"So inflation... may indeed bring benefits for a short time to favored groups, but only at the expense of others... It leads to the overexpansion of some industries at the expense of others. This involves a misapplication and waste of capital (throwing money at GM). When the inflation collapes, or is brought to a halt, the misdirected capital investment - whether in the form of machines, factories, or office buildings - cannot yield an adequate return and loses the greater part of its value. Nor is it possible to bring inflation to a smooth and gentle stop, and so avert a subsequent depression (1981-1982)...
"Yet the ardor for inflation never dies... Inflation is the auto-suggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation. It is the opium of the people. And this is precisely its political function. It is because inflation confuses everything that it is so consistently resorted to by our modern "planned economy" governments (Washington to take over Detroit, the housing industry, etc.)...
"Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow (hence Jim Cramer doesn't care - he'll just profit from the game while it lasts, and tough luck to anyone not as smart as he is). It discourages all prudence and thrift... It often makes it more profitable to speculate than to produce (housing bubble anyone?)... Its inexcusable injustices drive men toward desperate remedies (Obama). It plants the seeds of fascism and communism (not a problem for Obama?). It leads men to demand totalitarian controls (wage and price controls, nationalized health care). It ends invariably in bitter disillusion and collapse (unless a Ronald Reagan appears)."
Henry Hazlitt, "Economics in One Lesson"
Monday, December 08, 2008
RIP Annabelle Kaluna'alanui Fyfe
Annabelle Kaluna'alanui Fyfe was my Grandma. She was one of a kind. Personally, I think she was the greatest human being ever. I also think I'm not alone thinking that. Here she is in the late-1930s. Born November 22, 1917, Kealakekua, Hawaii (Big Island); died December 7, 2008, San Leandro, California. This armchair historian won't have any trouble remembering those dates. 
Nor will I have any trouble remembering her in her place as one of the Greatest Generation. The wives/moms who held it together at home for four years while the dads (Grandpa) were in harm's way won the War as much as any industrialist, general, or rocket genius. How few of us alive today could imagine what that must have taken. We can never honor their memory too much.
It is as regrettable as it is inevitable that so few of them are left to help steady us as we meet today's comparatively meager challenges. Certainly she helped me face my meager challenges. Theirs was a quality of character, which seems so rare and so needed today, forged, as David Maraniss illustrated through his portrait of their contemporary Vince Lombardi, "When Pride Still Mattered". I know that Grandma exemplified this.
Here she is when I graduated from college back in '82, with Grandpa to our right. That I might have made her happy ranks among my proudest moments.
I'm not going to describe in detail just how much she means to me. I'll probably never tell anyone. Karen has an idea. Suffice it to say that my quest for a purpose in life has ended: it is to see her again when my time comes, where she is now. Grandma, Jesus, and Ronald Reagan.
Her three children, Sylvia ("mom"), Robert ("Chuggie"), and Carole can speak in more detail about her life, and I will cheerfully defer to them on that score. I could not, however, let this occasion go by without taking this small step to see that any concerned know where I stand on the subject of my Grandma.
I'm going to miss her terribly. Of course, I'm comforted knowing where she is now. Still, I'm going to miss her for the links she personified: to the old Hawaii, to the Greatest Generation, to the best moments of my childhood, and so on.
I understand that Grandma's journey from the cares of this world to her Eternal Reward in the Kingdom of the Almighty was peaceful and without undue discomfort. My prayers were answered. Hers was a long life, well-lived, and she was adored by many. How lucky I am to be able to say she's my Grandma.
Nor will I have any trouble remembering her in her place as one of the Greatest Generation. The wives/moms who held it together at home for four years while the dads (Grandpa) were in harm's way won the War as much as any industrialist, general, or rocket genius. How few of us alive today could imagine what that must have taken. We can never honor their memory too much.
It is as regrettable as it is inevitable that so few of them are left to help steady us as we meet today's comparatively meager challenges. Certainly she helped me face my meager challenges. Theirs was a quality of character, which seems so rare and so needed today, forged, as David Maraniss illustrated through his portrait of their contemporary Vince Lombardi, "When Pride Still Mattered". I know that Grandma exemplified this.
Here she is when I graduated from college back in '82, with Grandpa to our right. That I might have made her happy ranks among my proudest moments.
I'm not going to describe in detail just how much she means to me. I'll probably never tell anyone. Karen has an idea. Suffice it to say that my quest for a purpose in life has ended: it is to see her again when my time comes, where she is now. Grandma, Jesus, and Ronald Reagan.
Her three children, Sylvia ("mom"), Robert ("Chuggie"), and Carole can speak in more detail about her life, and I will cheerfully defer to them on that score. I could not, however, let this occasion go by without taking this small step to see that any concerned know where I stand on the subject of my Grandma.
I'm going to miss her terribly. Of course, I'm comforted knowing where she is now. Still, I'm going to miss her for the links she personified: to the old Hawaii, to the Greatest Generation, to the best moments of my childhood, and so on.
I understand that Grandma's journey from the cares of this world to her Eternal Reward in the Kingdom of the Almighty was peaceful and without undue discomfort. My prayers were answered. Hers was a long life, well-lived, and she was adored by many. How lucky I am to be able to say she's my Grandma.
And Then there's the Ultimate Contrary Indicator...
The Irascible Don Luskin, from his site, poorandstupid.com:
Paul Krugman in Stockholm to collect his Nobel loot, and lecture the world on the the end of the world:
Krugman added that in his worst case scenario there would also be a series of extremely serious crises "in particular countries that are in big trouble."
What an insight. "Crises" in "countries that are in big trouble." Does that mean there will be no crises in countries that are not in big trouble? But I digress...
"We can easily be talking about a world economy that is depressed until 2011 and maybe beyond," Krugman said.
"If there's a safe place I can't see it."
Buy everything. Buy it now.
Thanks to Chris Ciancio and Ajeya Tatake.
Paul Krugman in Stockholm to collect his Nobel loot, and lecture the world on the the end of the world:
"A scenario I fear is that we'll see, for the whole world, an equivalent of Japan's lost decade, the 1990s -- that we'll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period," he told a news conference.
Krugman added that in his worst case scenario there would also be a series of extremely serious crises "in particular countries that are in big trouble."
What an insight. "Crises" in "countries that are in big trouble." Does that mean there will be no crises in countries that are not in big trouble? But I digress...
"We can easily be talking about a world economy that is depressed until 2011 and maybe beyond," Krugman said.
"If there's a safe place I can't see it."
Buy everything. Buy it now.
Thanks to Chris Ciancio and Ajeya Tatake.
Dennis Gartman Weighs In
Okay, you figured out that I was watching Fast Money today. And what a day it was in the world of money. First, there is the continuing saga of the Detroit Three bailout. Then, there's the Obamalama's weekend pronouncement on fiscal stimulus. So here is Dennis Gartman's take: "Obama is not going to pay any attention to the deficit, nor should he." Mr. Gartman thinks inflation is definitely an issue for the future. In this regard, he points to the very important facts that (a) as of now, the Fed is not monetizing debt; and (b) velocity is non-existent. Conclusion: "you want to own things that, if you drop 'em on your foot, they hurt."
I think Mr. Gartman is largely correct, however I'm not as optimistic as he is. In principle, I am not strongly against the idea of deficit-financed stimulus (though I'm very concerned that piling deficits upon deficits in a very inefficient manner, as is almost certainly going to happen, smacks of stagflation down the road). Further, it's nice that the Fed has not yet had to "monetize" (purchase government bonds in the open market as a means of pumping cash into the economy), but it would, franky, be a miracle if this happy circumstance lasted forever (note that with short-term bills paying essentially zero, and the 10-year at 2.74, somebody is monetizing for them... for now.)
Velocity non-existent? I'm going to assume this is true, because it sure looks like it. This is an argument for stimulus of all sorts. Sadly, we are likely going to get all sorts of inefficiently-applied stimulus on the demand side, and not a word about stimulus on the supply side (which would be where the velocity issue could be best addressed).
Bottom line: I think Mr. Gartman puts a seasoned, reasoned voice to the optimism we're now seeing on the Street. I want to emphasize, I don't by any means think there is no prospect for a sizeable bounce in both GDP and the stock markets; my concern is for what happens when people like Mr. Gartman decide that inflation has become an issue for the present. It's going to happen, and I don't mean in 10 years. But for now, I think you have to pay careful attention to his "hurts the foot" thesis.
I think Mr. Gartman is largely correct, however I'm not as optimistic as he is. In principle, I am not strongly against the idea of deficit-financed stimulus (though I'm very concerned that piling deficits upon deficits in a very inefficient manner, as is almost certainly going to happen, smacks of stagflation down the road). Further, it's nice that the Fed has not yet had to "monetize" (purchase government bonds in the open market as a means of pumping cash into the economy), but it would, franky, be a miracle if this happy circumstance lasted forever (note that with short-term bills paying essentially zero, and the 10-year at 2.74, somebody is monetizing for them... for now.)
Velocity non-existent? I'm going to assume this is true, because it sure looks like it. This is an argument for stimulus of all sorts. Sadly, we are likely going to get all sorts of inefficiently-applied stimulus on the demand side, and not a word about stimulus on the supply side (which would be where the velocity issue could be best addressed).
Bottom line: I think Mr. Gartman puts a seasoned, reasoned voice to the optimism we're now seeing on the Street. I want to emphasize, I don't by any means think there is no prospect for a sizeable bounce in both GDP and the stock markets; my concern is for what happens when people like Mr. Gartman decide that inflation has become an issue for the present. It's going to happen, and I don't mean in 10 years. But for now, I think you have to pay careful attention to his "hurts the foot" thesis.
Jeff Macke Weighs In
The bailout, "let's be honest, will never work." It's a "band aid on an ax wound." To Pete Najarian's remark that the bailout plan is "not so great" for common shareholders, Macke the Knife responds "not so great apparently being Armenian for absolute hose job."
Investment Thought of the Day
Today's ITD comes from Peter Thiel, principal of Clarium Capital Management, a "global macro" (I think that means "big picture") hedge fund. Mr. Thiel made the following observations on CNBC today with Maria Bartiromo.
I think this is consistent with my recent observations. (Obviously, this should be much more impressive to me than to the highly-esteemed Mr. Thiel.) First, Mr. Thiel's view is consistent with my belief that as pure panic abates (.01% 1/mo.; .01% 3/mo.!), both the economy and the stock market will rebound somewhat. After all, all that money on the sidelines is going to go somewhere. Second, we have yet to hear anything from any source indicating that inflation, down the road, is not going to be an issue. Take a look at the action in commodity and infrastructure stocks, as well as the home builders.
"I think the economy will stabilize faster than people think, then have more problems down the road than people think...
"We got into this mess because of excessive debt, and we're going to get out of it by papering over it with more debt?"
I think this is consistent with my recent observations. (Obviously, this should be much more impressive to me than to the highly-esteemed Mr. Thiel.) First, Mr. Thiel's view is consistent with my belief that as pure panic abates (.01% 1/mo.; .01% 3/mo.!), both the economy and the stock market will rebound somewhat. After all, all that money on the sidelines is going to go somewhere. Second, we have yet to hear anything from any source indicating that inflation, down the road, is not going to be an issue. Take a look at the action in commodity and infrastructure stocks, as well as the home builders.
Saturday, December 06, 2008
A Health Care Company that Makes Cars
That's the description William McGurn offered for GM in his WSJ column last week. Though this epithet is in no way Mr. McGurn's original material, he's to be congratulated on some very original thinking regarding a very old automaker issue - legacy costs in the form of health care obligations. The scope of the problem? GM "provides health care benefits for a million people today - only a fraction of their actual workers."!
McGurn's idea? Offload responsibility from employer to employee, using the hot new formula of Health Savings Accounts (HSAs) plus low-cost catastrophic coverage. Unquestionably, this would reduce costs for everyone. Why? Massive efficiencies to be gained by giving more control over spending decisions to consumers, who would not be "at the mercy of business managers and union leaders who agree to cut health benefits as part of a corporate rescue".
Moreover, as McGurn notes, this would not only benefit workers, and obviously auto companies (which would be liberated to act less like health care companies), but also those American workers who have no health coverage at all, yet who would be, under any bailout, "taxed to fulfill the generous promises made to the UAW".
The Quixotic McGurn challenges Rick Waggoner to use his platform before congress this week to encourage the membership to grease the wheels for such a transition. Alas, this is about as likely as Congress altering CAFE standards, another sure-fire way to aid Detroit sans bailouts.
McGurn's idea? Offload responsibility from employer to employee, using the hot new formula of Health Savings Accounts (HSAs) plus low-cost catastrophic coverage. Unquestionably, this would reduce costs for everyone. Why? Massive efficiencies to be gained by giving more control over spending decisions to consumers, who would not be "at the mercy of business managers and union leaders who agree to cut health benefits as part of a corporate rescue".
Moreover, as McGurn notes, this would not only benefit workers, and obviously auto companies (which would be liberated to act less like health care companies), but also those American workers who have no health coverage at all, yet who would be, under any bailout, "taxed to fulfill the generous promises made to the UAW".
The Quixotic McGurn challenges Rick Waggoner to use his platform before congress this week to encourage the membership to grease the wheels for such a transition. Alas, this is about as likely as Congress altering CAFE standards, another sure-fire way to aid Detroit sans bailouts.
Today's History Lesson
"At the Constitutional Convention, the delegates had decided to create a federal district, ten miles square, in an unspecified location. This decision generated melodramatic speculation. Some people found the idea of a separate capital fraught with danger, fearing a privileged enclave. Governor George Clinton envisioned the ten-mile square as the scene of a presidential 'court' disfigured by royal trappings and marked by 'ambition with idleness, baseness with pride, the thirst of riches without labor...flattery...treason...perfidy, but above all the perpetual ridicule of virtue.'"
Ron Chernow, "Alexander Hamilton", pp.324-25
Ron Chernow, "Alexander Hamilton", pp.324-25
Friday, December 05, 2008
The Chevy Volt - That's the Ticket!
The Chevy Volt is GM's forthcoming plug-in hybrid. It will have to be re-charged for 6 hours to provide 40 miles of gasoline-free driving. It is acknowledged to be unsalable without multiple government subsidies. With subsidies, it will be priced at $40K, at which it will still be a money-loser. Recall, Detroit is pilloried for selling vehicles that still can be made and sold profitably. Nevertheless, the omniscient Obamalama wants to condition a UAW bailout on a mandate that Detroit made more "green" cars. Hmmm. If consumers wanted "green" cars, would a mandate be necessary? More specifically, if consumers wanted Detroit's "green" cars, would such a mandate be necessary?
As Holman Jenkins gloomily describes the above scenario, "Washington here is just marching Detroit deeper into an unsustainable business model, requiring ever more interventions in the future." Mr. Jenkins further speculates, with good reason, that on this path, nationalization is the next stop. How'd that turn out for British Leyland? I'm seeing years, if not decades, of massive taxpayer subsidies to keep Michigan afloat, at a huge cost to GDP growth and the nation's fiscal health, leading ultimately to a sale (re-privatization) to healthy foreign-based makers, upon condition that massive deregulation occurs.
Mr. Jenkins suggests (again) that we ought to just scrap CAFE altogether and allow Detroit to produce a product mix that will maximize profitability - rather than being forced by CAFE rules to build excess small cars in UAW plants. Remarkably, the less we hear from Washington about reforming CAFE - a 1970s relic that pre-dates the explosion of high-mileage Japanese sales - the more we hear about "conditions" (i.e., micromanaging) to Detroit from Washington. Has anyone considered that this is a big reason why Detroit landed in this unfriendly place to begin with?
Folks, the same people who created the housing bubble and bust are now going to run Detroit. Thus we have the Chevy Volt, a very imperfect vehicle, which nevertheless serves as a most worthy exemplar not only of where Detroit is headed in this brave new world of Washington control, but also of what is in store for the greater economy. As I mentioned on Tom Sullivan's show some weeks ago, all thinking people should know where this road ends. It's called stagflation - if not serfdom.
As Holman Jenkins gloomily describes the above scenario, "Washington here is just marching Detroit deeper into an unsustainable business model, requiring ever more interventions in the future." Mr. Jenkins further speculates, with good reason, that on this path, nationalization is the next stop. How'd that turn out for British Leyland? I'm seeing years, if not decades, of massive taxpayer subsidies to keep Michigan afloat, at a huge cost to GDP growth and the nation's fiscal health, leading ultimately to a sale (re-privatization) to healthy foreign-based makers, upon condition that massive deregulation occurs.
Mr. Jenkins suggests (again) that we ought to just scrap CAFE altogether and allow Detroit to produce a product mix that will maximize profitability - rather than being forced by CAFE rules to build excess small cars in UAW plants. Remarkably, the less we hear from Washington about reforming CAFE - a 1970s relic that pre-dates the explosion of high-mileage Japanese sales - the more we hear about "conditions" (i.e., micromanaging) to Detroit from Washington. Has anyone considered that this is a big reason why Detroit landed in this unfriendly place to begin with?
Folks, the same people who created the housing bubble and bust are now going to run Detroit. Thus we have the Chevy Volt, a very imperfect vehicle, which nevertheless serves as a most worthy exemplar not only of where Detroit is headed in this brave new world of Washington control, but also of what is in store for the greater economy. As I mentioned on Tom Sullivan's show some weeks ago, all thinking people should know where this road ends. It's called stagflation - if not serfdom.
Quote of the Day
"When government decides to solve something, we have learned to be wary. The cure may not always be worse than the disease, but it is usually bigger and it costs more."
Ronald Reagan, Oct. 29, 1972
Ronald Reagan, Oct. 29, 1972
Today's Economics Lesson
Is from Thomas Sowell, on minimum wage laws and human capital:
Applied Economics, Thinking Beyond Stage One, pp.40-41
"How does removing one of the options of people with few options make them better off? Similar one-stage thinking is also apparent in many observers who wax indignant over low-wage workers employed in the Third World by multinational corporations. While the pay of such workers is often low by comparison with that of workers in more affluent industrial societies, so too is their productivity. An international consulting firm determined that the average labor productivity in the modern sectors in India is 15 percent of that in the United States...
"In other words, if you hired an average Indian worker and paid him one-fifth of what you paid an average American worker, it would cost you more to get a given amount of work done in India than in the United States. Paying 20 percent of what an American worker earns to someone who produces only 15 percent of what an American worker produces increases your labor costs, even though you are hiring 'cheap labor' and are virtually certain to be accused of 'exploitation'."
Applied Economics, Thinking Beyond Stage One, pp.40-41
Thursday, December 04, 2008
The Era of Illusory Peace
Many thanks to the editors of the WSJ for this reminder that the Clinton Era was no kind of "foreign-policy golden age":
"We recall it mostly as an era of illusory peace as problems festered with too little U.S. attention. Al Qaeda was left unchecked, Saddam Hussein banished U.N. inspectors and exploited Oil for Food, North Korea embarked on a secret nuclear program, Russia's post-Cold War spring faded, and Pakistan's A.Q. Khan spread nuclear-bomb technology around the world."
Never Mind
Consistent with Rush's recent expressions of wonderment regarding the degree to which the press and democrats (I know, a redundancy), including Barry O himself, are now learning that "that GWB, he's really a heckuva guy", I saw a piece in the Nov. 4 WSJ concerning Guantanamo Bay entitled ,"Guantanamo Revelation". This piece was a response to a 1600 word study of Gitmo in the New York Times, which could have been entitled "Never Mind".
It seems that upon extensive examination of the details, the Times has found that "gee whiz, many of the terrorists at Gitmo really are dangerous terrorists." In fact, the Gitmo detainees include many implicated in such crimes as the 1998 Kenya Embassy bombing, the USS Cole bombing, as well as the "Dirty 30" - OBL's personal bodyguards. Moreover, the poor little lambs are in fact so notorious that "at least 60 detainees have been cleared for release or transfer but no other countries will accept them." Any democratic congressman care to offer up his district?
Here's the upshot. Now that GWB is on his way out, neither he, nor his policies, need to be destroyed. "Delendo Carthago Est" no longer applies. I have maintained for years - since shortly after the initial invasion phase of Iraq - that GWB had to be destroyed, because success in Iraq would yield to the GOP electoral riches almost beyond imagining. In short, party before country (not a problem for those who don't believe in country anyway - "Imagine"!).
Now, their "mission accomplished", having gotten what they apparently wished for (the actual responsibility of governing), I guess we can expect to hear more about how that GWB is not such a bad guy after all, and his policies really weren't so far off. In fact, they can probably be made to work - with just a little bit of that old magic from the Obamalama.
It seems that upon extensive examination of the details, the Times has found that "gee whiz, many of the terrorists at Gitmo really are dangerous terrorists." In fact, the Gitmo detainees include many implicated in such crimes as the 1998 Kenya Embassy bombing, the USS Cole bombing, as well as the "Dirty 30" - OBL's personal bodyguards. Moreover, the poor little lambs are in fact so notorious that "at least 60 detainees have been cleared for release or transfer but no other countries will accept them." Any democratic congressman care to offer up his district?
Here's the upshot. Now that GWB is on his way out, neither he, nor his policies, need to be destroyed. "Delendo Carthago Est" no longer applies. I have maintained for years - since shortly after the initial invasion phase of Iraq - that GWB had to be destroyed, because success in Iraq would yield to the GOP electoral riches almost beyond imagining. In short, party before country (not a problem for those who don't believe in country anyway - "Imagine"!).
Now, their "mission accomplished", having gotten what they apparently wished for (the actual responsibility of governing), I guess we can expect to hear more about how that GWB is not such a bad guy after all, and his policies really weren't so far off. In fact, they can probably be made to work - with just a little bit of that old magic from the Obamalama.
Investment Thought of the Day
From Doug Kass, courtesy Larry Kudlow's kudlowsmoneypolitics blog. According to Mr. Kass, we are witnessing a "once in a lifetime short opportunity in fixed income investments".
I agree. After all, how much closer to zero can we get? Besides which, I'm becoming more and more convinced by the day that, as the old French economist (Jacques Reuff) might say, "The Age of Inflation" is upon us. It is only a matter of time, as I see it, before significant inflation premiums are once again priced into bonds. (See Robert J. Samuelson, "The Great Inflation and its Aftermath".)
This will not be good for stocks. It would be the flip side of the phenomenon which occurred beginning November, 1994, when the 30-year yield peaked at, if I recall, 8.04% on Election Day! The downward reversal of the long-term interest rate trend in the wake of the Republican takeover of Congress was the precipitating factor in the stock market boom of that decade (though other factors, particularly the capital gains rate reduction in Clinton's second term, later contributed greatly).
I agree. After all, how much closer to zero can we get? Besides which, I'm becoming more and more convinced by the day that, as the old French economist (Jacques Reuff) might say, "The Age of Inflation" is upon us. It is only a matter of time, as I see it, before significant inflation premiums are once again priced into bonds. (See Robert J. Samuelson, "The Great Inflation and its Aftermath".)
This will not be good for stocks. It would be the flip side of the phenomenon which occurred beginning November, 1994, when the 30-year yield peaked at, if I recall, 8.04% on Election Day! The downward reversal of the long-term interest rate trend in the wake of the Republican takeover of Congress was the precipitating factor in the stock market boom of that decade (though other factors, particularly the capital gains rate reduction in Clinton's second term, later contributed greatly).
Rahm Emmanuel, IL Duce!
Recently, Rush did us all the favor of playing the tape of Rahm Emmanuel's pronouncement that a crisis is a terrible thing to waste. Rush surely gets the message. He's been hammering this theme concerning the essential "character" of the Democrat party for years: they can never let you know what they're really up to, since that would make them unelectable. Or, as he put it during the Clinton years, "these people wake up every morning asking themselves, 'how can we trick 'em today'."
Well, Rahm Emmanuel was a part of that administration, and he's still asking himself that question. He knows full well that the American people, in "normal" times, would never knowingly adopt the true agenda of today's radical Dems, who are nothing but a lot of aging '60s radicals, and younger '60s radical wannabees, selling themselves fraudulently as Harry Truman or John Kennedy. Thus it is somewhat surprising that Mr. Emmanuel is so up front about his intent to, in essence, trick America into adopting a radical socialist agenda, while it's still vulnerable, disoriented, and panicky as a result of financial turmoil. In other words, get them to fall for, while in a vulnerable state, a program of vastly expanding central government power at massive cost to the nation's working men and women, which they would never approve while thinking rationally. When he admits that the financial crisis is, for him, an opportunity in just this sense, what other conclusion can we draw?
Friends, if this isn't the very definition of fascism I don't know what is. It is a subversion of democracy to foment panic in the hope that disoriented voters will approve their own undoing. Moreover, it makes me harbor serious doubt as to whether this crowd is anxious at all for the panic to abate and an economic recovery to ensue. As I alluded to previously, Barry O has options available to him which would do a much better job of restoring confidence than the dog-and-pony shows surrounding the Detroit automakers, or nominating as Treasury Secretary one of the same crowd that has been leading the charge for ever greater central government intervention (I say the recent stock market rally was much more about options expirations, short covering, etc., and perhaps some small sense of relief, than a vote of confidence in Mr. Geithner).
For starters, he could simply pledge no new taxes - the understanding since 11/06 that the Bush tax cuts would almost certainly expire has been ruinous to confidence. Another great step would be to scrap CAFE standards. Unfortunately, we know that will never happen, thus the sense that we are governed by nothing but free-spending clowns grows ever greater. The failure of the incoming administration to address our nation's problems seriously, rather than pandering to ancient interest groups and bowing to nonsensical political dogma, leads me to a sad conclusion: this crowd is much less interested in solving problems than in exploiting them. As FDR said, this isn't about a recovery, "this is politics." Please, dear readers, don't forget this.
Well, Rahm Emmanuel was a part of that administration, and he's still asking himself that question. He knows full well that the American people, in "normal" times, would never knowingly adopt the true agenda of today's radical Dems, who are nothing but a lot of aging '60s radicals, and younger '60s radical wannabees, selling themselves fraudulently as Harry Truman or John Kennedy. Thus it is somewhat surprising that Mr. Emmanuel is so up front about his intent to, in essence, trick America into adopting a radical socialist agenda, while it's still vulnerable, disoriented, and panicky as a result of financial turmoil. In other words, get them to fall for, while in a vulnerable state, a program of vastly expanding central government power at massive cost to the nation's working men and women, which they would never approve while thinking rationally. When he admits that the financial crisis is, for him, an opportunity in just this sense, what other conclusion can we draw?
Friends, if this isn't the very definition of fascism I don't know what is. It is a subversion of democracy to foment panic in the hope that disoriented voters will approve their own undoing. Moreover, it makes me harbor serious doubt as to whether this crowd is anxious at all for the panic to abate and an economic recovery to ensue. As I alluded to previously, Barry O has options available to him which would do a much better job of restoring confidence than the dog-and-pony shows surrounding the Detroit automakers, or nominating as Treasury Secretary one of the same crowd that has been leading the charge for ever greater central government intervention (I say the recent stock market rally was much more about options expirations, short covering, etc., and perhaps some small sense of relief, than a vote of confidence in Mr. Geithner).
For starters, he could simply pledge no new taxes - the understanding since 11/06 that the Bush tax cuts would almost certainly expire has been ruinous to confidence. Another great step would be to scrap CAFE standards. Unfortunately, we know that will never happen, thus the sense that we are governed by nothing but free-spending clowns grows ever greater. The failure of the incoming administration to address our nation's problems seriously, rather than pandering to ancient interest groups and bowing to nonsensical political dogma, leads me to a sad conclusion: this crowd is much less interested in solving problems than in exploiting them. As FDR said, this isn't about a recovery, "this is politics." Please, dear readers, don't forget this.
Stimulus, Hangover; More Stimulus, Bigger Hangover
Reading the sometimes-excellent Steve Sailer's lengthy piece yesterday on infrastructure spending, the old lightbulb-in-a-balloon over my head illuminated. Actually, it was the last segment of Sailer's piece that caused this phenomenon(?), in combination with a 24-month chart of crude prices that went up on CNBC. Try this on for size: we are now in the hangover phase of a Keynesian stimulus, whose origins lie with Alan Greenspan's (aka, "The Maestro") post-9/11 efforts to postpone the economic effects of the terrorist calamity by creating a housing bubble. Now, it seems, we are going to try to power our way out of this hangover with even greater Keynesian stimulus. How should we expect this to end?
Here's how I came up with this crazy theory. First, per Mr. Sailer, "California got us into this mess." How? A classic, banana-republic 2-step: (a) as epicenter of an affirmative action housing bubble, which was engineered as a post-9/11 stimulus; and (b) as poster child for the irresponsible and clueless inability of state and local governments to balance a budget even during boom times.
Next, of course, is the federal gummint, and its massive deficits during a lengthy expansionary phase. And third, there is the bursting of the oil bubble. Not that the oil bubble was stimulative, of course, but that it may have been symptomatic of all of the above-mentioned, 1960s-style, guns-and-butter, over-stimulation and hangover.
Conclusion? The problem with Keynesian stimulus is that, as with so many ingestibles, recreational or otherwise, the more you use it, the bigger the dose that's needed to achieve ever-decreasing effect, ending eventually in a painful detoxification (see 1981-82, depression of). Washington is now determined to drink its way out of the current hangover, by throwing cash by the tens of billions at failed business models, inept state governments, and jobs programs slated to cost upwards of $1M per job created (per WSJ editor Stephen Moore). As the highly-esteemed Holman Jenkins describes in yesterday's WSJ with the wonderfully apropos athletic/religious metaphor of the "Hail Mary" pass, "unless Gerard Phelan catches the ball (from Doug Flutie) in the end zone and GDP bounces back strongly, the bailout's end result may be towering tax rates, domestic spending cuts or serious inflation - or all three."
All of this points back to November, 2006. In fact, it really points back to a time many moons earlier when "The Maestro" pounded his fist on the table and told us all to buy houses and take loans, because he's going to keep rates low. I felt at the time that this was an appropriate response to the 9/11-caused recession, provided that responsible fiscal policy could pick up the slack once the bill on this gambit came due. As dubious a proposition as "responsible fiscal policy" may have seemed at the time, as of November, 2006, it became completely implausible (and the markets knew it). Thus, the current hangover, and it looks to me like the Obamalama is prescribing (at least) a liter of Vodka therapy. So unless, per Holman Jenkins, Flutie actually connects with Phelan, the next stop on this Keynesian ride is going to be a lengthy detox.
Here's how I came up with this crazy theory. First, per Mr. Sailer, "California got us into this mess." How? A classic, banana-republic 2-step: (a) as epicenter of an affirmative action housing bubble, which was engineered as a post-9/11 stimulus; and (b) as poster child for the irresponsible and clueless inability of state and local governments to balance a budget even during boom times.
Next, of course, is the federal gummint, and its massive deficits during a lengthy expansionary phase. And third, there is the bursting of the oil bubble. Not that the oil bubble was stimulative, of course, but that it may have been symptomatic of all of the above-mentioned, 1960s-style, guns-and-butter, over-stimulation and hangover.
Conclusion? The problem with Keynesian stimulus is that, as with so many ingestibles, recreational or otherwise, the more you use it, the bigger the dose that's needed to achieve ever-decreasing effect, ending eventually in a painful detoxification (see 1981-82, depression of). Washington is now determined to drink its way out of the current hangover, by throwing cash by the tens of billions at failed business models, inept state governments, and jobs programs slated to cost upwards of $1M per job created (per WSJ editor Stephen Moore). As the highly-esteemed Holman Jenkins describes in yesterday's WSJ with the wonderfully apropos athletic/religious metaphor of the "Hail Mary" pass, "unless Gerard Phelan catches the ball (from Doug Flutie) in the end zone and GDP bounces back strongly, the bailout's end result may be towering tax rates, domestic spending cuts or serious inflation - or all three."
All of this points back to November, 2006. In fact, it really points back to a time many moons earlier when "The Maestro" pounded his fist on the table and told us all to buy houses and take loans, because he's going to keep rates low. I felt at the time that this was an appropriate response to the 9/11-caused recession, provided that responsible fiscal policy could pick up the slack once the bill on this gambit came due. As dubious a proposition as "responsible fiscal policy" may have seemed at the time, as of November, 2006, it became completely implausible (and the markets knew it). Thus, the current hangover, and it looks to me like the Obamalama is prescribing (at least) a liter of Vodka therapy. So unless, per Holman Jenkins, Flutie actually connects with Phelan, the next stop on this Keynesian ride is going to be a lengthy detox.
Today's CAFE Update
From the WSJ, 11/19/08:
Louis Woodhill, Club for Growth, as quoted from Real Clear Politics
"It is difficult to overstate the damage that CAFE has done to GM over the years. The entire purpose of CAFE is to force companies like GM to do something other than build and sell the vehicles that would earn them the greatest profit...CAFE has bled GM of tens of billions of dollars in profits over the years. If they had all of those dollars in the bank today, they would not be on the brink of bankruptcy. CAFE forced GM to build millions of small cars and sell them at a loss. To make matters worse, CAFE made it illegal for GM to exploit its single most profitable brand, Cadillac."
Louis Woodhill, Club for Growth, as quoted from Real Clear Politics
Today's History Lesson
"It's (Japanese Supreme Council) final plan for the defense of Japan itself, 'Operation Decision', provided for the use of 10,000 suicide planes... 2,350,000 trained troops would fight on the beaches, backed by 4 million army and navy civil employees and a civilian militia of 28 million. Their weapons were to include muzzle-loaders, bamboo spears, and bows and arrows...
American intelligence quickly became aware of this fight-to-the-finish strategy, and American commanders were under no illusions, in the light of their experience in conquering the mid-Pacific islands, what it would mean in terms of casualties... By this stage in the war, the Americans had suffered 280,677 combat deaths in Europe and 41,322 in the Pacific, plus 115,187 service deaths from non-hostile causes, and 971,801 non-fatal casualties. In addition, 10,650 US servicemen had died while prisoners of war of the Japanese (out of a total of 25,600). The Allied commanders calculated that, if an invasion of Japan became necessary, they must expect up to a million further casualties. Japanese losses, assuming comparable ratios to those already experienced, would be in the range of 10 million to 20 million." Paul Johnson, "A History of the American People".
According to the Washington Post, as of November 14, 2008, U.S. casualties in Iraq total 4196 KIA, and 30,793 non-fatal casualties.
American intelligence quickly became aware of this fight-to-the-finish strategy, and American commanders were under no illusions, in the light of their experience in conquering the mid-Pacific islands, what it would mean in terms of casualties... By this stage in the war, the Americans had suffered 280,677 combat deaths in Europe and 41,322 in the Pacific, plus 115,187 service deaths from non-hostile causes, and 971,801 non-fatal casualties. In addition, 10,650 US servicemen had died while prisoners of war of the Japanese (out of a total of 25,600). The Allied commanders calculated that, if an invasion of Japan became necessary, they must expect up to a million further casualties. Japanese losses, assuming comparable ratios to those already experienced, would be in the range of 10 million to 20 million." Paul Johnson, "A History of the American People".
According to the Washington Post, as of November 14, 2008, U.S. casualties in Iraq total 4196 KIA, and 30,793 non-fatal casualties.
Wednesday, December 03, 2008
CAFE and the Ruin of Detroit
Holman Jenkins of the WSJ recently hit upon a tremendous idea that would not only help the Detroit Three survive (and perhaps even thrive if and when the economy returns to growth mode), but also save the taxpayers from massive subsidization of failure, which, as we know all-too-well, will only beget more failure. His solution: abolish the ridiculous "two fleet" rule that guides CAFE compliance.
The "two fleet" rule holds that in determining CAFE compliance, manufacturers must segregate their fleets by "domestic" and "non-domestic" production. Then, a determination is made for each of these categories, separately, whether they comply with CAFE. Thus, even if your combined "domestic" and "non-domestic" fleets are in compliance, if your "domestic" fleet, by itself, is not, it must bring itself into compliance or pay heavy fines.
The effect of this approach, according to Mr. Jenkins, is that domestic manufacturers are trapped into making large numbers of money-losing, high-mileage vehicles in the U.S., as a sop to the UAW. This dilemma has potentially huge consequences not just for the health of Detroit, but for economic recovery generally.
Folks, this is the 21st century. Walter Reuther died in 1970. Ancient rules such as the "two fleet" rule are the barnacle-encrusted residue of a world in which the "Big Three" ruled like Triceratops, and the UAW squeezed them for their share. Now, in a world in which the "Big Three" are clinging to life, thanks to this anachronism we are faced with two alternatives, on promising, one ugly.
The good: permit a company, such as Chrysler "which has a perfectly salvageable business" to meet CAFE standards by making low value-added, high mileage vehicles offshore, thus leveling the cost structure playing field with "foreign" makes (which not only aren't unionized, but infamously evade the two-fleet rule by minimizing domestic content in their U.S.-made cars so they can count as "non-domestic").
The ugly: a never-ending bailout, consisting not only of direct taxpayer aid, but massive indirect costs to the nation in terms of protectionism and "taxpayer financed industrial cronyism".
I wish I could be optimistic about where this is headed. In theory, the indications of apparent willingness on the part of the UAW to go along with "concessions" might indicate the possibility of a solution along the lines set forth above. But, as mentioned in other posts, I'm afraid the endgame doesn't involve putting the Detroit Three on a solid footing for profitability as private (non-goverment sponsored) entities. This, I'm certain, bodes ill for economic growth.
The "two fleet" rule holds that in determining CAFE compliance, manufacturers must segregate their fleets by "domestic" and "non-domestic" production. Then, a determination is made for each of these categories, separately, whether they comply with CAFE. Thus, even if your combined "domestic" and "non-domestic" fleets are in compliance, if your "domestic" fleet, by itself, is not, it must bring itself into compliance or pay heavy fines.
The effect of this approach, according to Mr. Jenkins, is that domestic manufacturers are trapped into making large numbers of money-losing, high-mileage vehicles in the U.S., as a sop to the UAW. This dilemma has potentially huge consequences not just for the health of Detroit, but for economic recovery generally.
Folks, this is the 21st century. Walter Reuther died in 1970. Ancient rules such as the "two fleet" rule are the barnacle-encrusted residue of a world in which the "Big Three" ruled like Triceratops, and the UAW squeezed them for their share. Now, in a world in which the "Big Three" are clinging to life, thanks to this anachronism we are faced with two alternatives, on promising, one ugly.
The good: permit a company, such as Chrysler "which has a perfectly salvageable business" to meet CAFE standards by making low value-added, high mileage vehicles offshore, thus leveling the cost structure playing field with "foreign" makes (which not only aren't unionized, but infamously evade the two-fleet rule by minimizing domestic content in their U.S.-made cars so they can count as "non-domestic").
The ugly: a never-ending bailout, consisting not only of direct taxpayer aid, but massive indirect costs to the nation in terms of protectionism and "taxpayer financed industrial cronyism".
I wish I could be optimistic about where this is headed. In theory, the indications of apparent willingness on the part of the UAW to go along with "concessions" might indicate the possibility of a solution along the lines set forth above. But, as mentioned in other posts, I'm afraid the endgame doesn't involve putting the Detroit Three on a solid footing for profitability as private (non-goverment sponsored) entities. This, I'm certain, bodes ill for economic growth.
Quote of the Day
"General Motors does not make cars. General Motors makes money."
Alfred P. Sloan, President and Chairman, General Motors, 1923-1956.
Alfred P. Sloan, President and Chairman, General Motors, 1923-1956.
Scary, Scary Charts
Louise Yamada, renowned technical analyst and winner of multiple Institutional Investor awards, recently appeared on CNBC. She put up a chart of the S&P 500 from 1980 to present. Friends, this was the most frightening chart or graph I think I've ever seen. We've broken support on the right side of a massive double top, on the way down to the long, long-term trend line. Can you say Dow 6000?
This reminded me of something I've thought of quite a bit recently. In 1996, I heard a presentation by one Alan Shaw, since retired, who at the time was Chief Technical Analyst at one of the big counting houses. He put a chart of the Nikkei over a chart of the S&P, and it was chilling. It was the same chart, only we were 12 or so years behind. He then launched into a discussion of demographics, specifically noting that our demo trends trailed Japan's by, oh, about 12 years or so. He concluded this segment of his talk by saying: "Hey, I don't have a crystal ball. I don't claim to have all the answers. But we've got to ask ourselves some questions here, don't we?"
Are we looking at a multi-year walk in the wilderness similar to what Japan has endured? Is there any way we could avoid it? I hate to be a broken record, but the one thing we can't do is repeat the mistakes of the past, and throw good money after bad. If we've got to reflate massively and then take our chances, that's fine, but there are right ways to do that, and there are wrong ways. Pandering to a decrepit labor union and its ossified political machinery does not exactly inspire.
This reminded me of something I've thought of quite a bit recently. In 1996, I heard a presentation by one Alan Shaw, since retired, who at the time was Chief Technical Analyst at one of the big counting houses. He put a chart of the Nikkei over a chart of the S&P, and it was chilling. It was the same chart, only we were 12 or so years behind. He then launched into a discussion of demographics, specifically noting that our demo trends trailed Japan's by, oh, about 12 years or so. He concluded this segment of his talk by saying: "Hey, I don't have a crystal ball. I don't claim to have all the answers. But we've got to ask ourselves some questions here, don't we?"
Are we looking at a multi-year walk in the wilderness similar to what Japan has endured? Is there any way we could avoid it? I hate to be a broken record, but the one thing we can't do is repeat the mistakes of the past, and throw good money after bad. If we've got to reflate massively and then take our chances, that's fine, but there are right ways to do that, and there are wrong ways. Pandering to a decrepit labor union and its ossified political machinery does not exactly inspire.
My Friends, It's Over
I'm not referring specifically to the recent stock market action (although that is depressing enough). I'm referring to the thesis of the estimable and ever-youthful (this guy must be a relative of Dick Clark) Arthur Laffer. His new book is entitled "The End of Prosperity". I have just obtained a copy of same, and will review it here in the near future. Dr. Laffer outlined his thesis in a recent opinion piece in the WSJ, which I attempt to faithfully summarize below.
Importantly, Dr. Laffer begins his WSJ piece ("The Age of Prosperity is Over") by restating a most fundamental, but too often ignored point: "Financial panics, if left alone, rarely cause much damage to the real economy, output, employment, or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent." Translation: a free and unfettered marketplace will, even in troubled times, brilliantly redirect capital away from inefficient holders and uses, toward newer and more efficient uses and processes. Thus recessions, though painful, are nevertheless unavoidable and actually accomplish a salutary function: they prune deadwood from the economic tree, and separate fools from their money. This is the process by which a dynamic modern economy sets the stage for the deployment of new technologies, thus creating every-higher living standards.
If you can't quite buy this, ask yourself whether it makes sense to loan money to borrowers with a history of non-repayment; or to prop up dying industries endlessly, a la pre-Thatcher Britain, or Detroit (whatever happened to British Steel, British automakers, British motorcycles, etc.?). If you need a case study in throwing good money after bad, study what's happened to Detroit over the last 40 years. As Dr. Laffer put it: "Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it."
What does this mean for prosperity? "The government doesn't create anything: it just redistributes. Whenever the government bails someone out of trouble, they always put someone else in trouble, plus of course a toll for the troll (Washington)." Thus, if you like the way Washington runs the Post Office, Fannie Mae, Freddie Mac, etc., you're gonna love what they do for Wall Street and Detroit. I ask you, dear readers, what will this do for the recovery?
Importantly, Dr. Laffer begins his WSJ piece ("The Age of Prosperity is Over") by restating a most fundamental, but too often ignored point: "Financial panics, if left alone, rarely cause much damage to the real economy, output, employment, or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent." Translation: a free and unfettered marketplace will, even in troubled times, brilliantly redirect capital away from inefficient holders and uses, toward newer and more efficient uses and processes. Thus recessions, though painful, are nevertheless unavoidable and actually accomplish a salutary function: they prune deadwood from the economic tree, and separate fools from their money. This is the process by which a dynamic modern economy sets the stage for the deployment of new technologies, thus creating every-higher living standards.
If you can't quite buy this, ask yourself whether it makes sense to loan money to borrowers with a history of non-repayment; or to prop up dying industries endlessly, a la pre-Thatcher Britain, or Detroit (whatever happened to British Steel, British automakers, British motorcycles, etc.?). If you need a case study in throwing good money after bad, study what's happened to Detroit over the last 40 years. As Dr. Laffer put it: "Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it."
What does this mean for prosperity? "The government doesn't create anything: it just redistributes. Whenever the government bails someone out of trouble, they always put someone else in trouble, plus of course a toll for the troll (Washington)." Thus, if you like the way Washington runs the Post Office, Fannie Mae, Freddie Mac, etc., you're gonna love what they do for Wall Street and Detroit. I ask you, dear readers, what will this do for the recovery?
Tuesday, December 02, 2008
The Obama Benchmarks
Hugh Hewitt posted a piece recently setting forth the economic benchmarks by which the Obama administration should be judged. Specifically, Hugh lays out various economic statistics as of November 5, 2008, and suggests that in the fall of 2012, the state of these stats should be the basis on which the incoming administration - at least as to economic policy - should be judged.
At first blush, I felt this was unfair and unrealistic. After all, as of today, in fact until more than six weeks from today, Barry O possesses ZERO executive authority. We only have one President at a time, don't ya know. Moreover, drawing accurate conclusions concerning the effects of any President's economic policies is a tricky enough business, due to time lags and myriad external factors, both foreseeable and not, without further muddying the waters with arbitrary judgment days.
I've changed my mind. There is much the Obamalama could be doing now to calm our extremely nervous markets, but isn't, notwithstanding some appointments which are, quite honestly, as good as any conservative could have hoped for. In view of his seedy, far-left background, all the talk on Capitol Hill of a new New Deal, and Rahm Emmanuel's reference to the financial crisis as an opportunity (to "fundamentally change the country"?), I think it's fair to assume, until proven otherwise, that the magical O may not be too terribly disturbed by financial chaos and a deteriorating general economy. Further, I think the markets know this, just as well as they know that our Congress is controlled by a clamorous claque of clowns. Remember, "this is politics".
At first blush, I felt this was unfair and unrealistic. After all, as of today, in fact until more than six weeks from today, Barry O possesses ZERO executive authority. We only have one President at a time, don't ya know. Moreover, drawing accurate conclusions concerning the effects of any President's economic policies is a tricky enough business, due to time lags and myriad external factors, both foreseeable and not, without further muddying the waters with arbitrary judgment days.
I've changed my mind. There is much the Obamalama could be doing now to calm our extremely nervous markets, but isn't, notwithstanding some appointments which are, quite honestly, as good as any conservative could have hoped for. In view of his seedy, far-left background, all the talk on Capitol Hill of a new New Deal, and Rahm Emmanuel's reference to the financial crisis as an opportunity (to "fundamentally change the country"?), I think it's fair to assume, until proven otherwise, that the magical O may not be too terribly disturbed by financial chaos and a deteriorating general economy. Further, I think the markets know this, just as well as they know that our Congress is controlled by a clamorous claque of clowns. Remember, "this is politics".
Today's Economics Lesson
Today's economics lesson addresses a tax policy phenomenon known as Hauser's Law. Hauser's Law is named for San Francisco-based investment manager Kurt Hauser, whose research into tax policy uncovered a very weak correlation between changes in income tax rates, and changes in income tax revenues as a percentage of GDP. In other words, even if you raise income tax rates substantially, it would be a mistake to expect income tax revenues, as a percentage of GDP, to increase meaningfully, if at all. Conversely, by lowering income tax rates, one should not expect that income tax revenues, as a percentage of GDP, would decline.
What's our takeaway here, you ask? Achieving the goal of increasing income tax revenues is, for all practical purposes, a function of increasing GDP, not increasing tax rates. Thus, in order to fatten government coffers to achieve fiscal goals such as deficit reduction, or building out a "social safety net", the solution is growing GDP, not raising tax rates. How do you grow GDP? Incentives. Provide incentives for the hardworking, innovative, and frugal to direct their considerable energies (and capital) toward economic best uses.
So ask yourself, does a particular policy provide such incentives? Does it unleash "animal spirits", or cage them? What do you think would be the effect on GDP growth of increasing taxes on income (aka, work), or throwing billions at Detroit? Hauser's Law provides what is perhaps the single most important tool for evaluating fiscal policy initiatives.
What's our takeaway here, you ask? Achieving the goal of increasing income tax revenues is, for all practical purposes, a function of increasing GDP, not increasing tax rates. Thus, in order to fatten government coffers to achieve fiscal goals such as deficit reduction, or building out a "social safety net", the solution is growing GDP, not raising tax rates. How do you grow GDP? Incentives. Provide incentives for the hardworking, innovative, and frugal to direct their considerable energies (and capital) toward economic best uses.
So ask yourself, does a particular policy provide such incentives? Does it unleash "animal spirits", or cage them? What do you think would be the effect on GDP growth of increasing taxes on income (aka, work), or throwing billions at Detroit? Hauser's Law provides what is perhaps the single most important tool for evaluating fiscal policy initiatives.
Crisis, or Opportunity?
What was it that Rahm Emmanuel recently said? A crisis is a terrible thing to waste?
Way, way back in September, weeks before the election, weeks even before I re-started this blog, I asked myself the following question: Given that most of the Democrat-installed crap had been stripped out of the $700B TARP legislation, why were the Dems nevertheless so much more enthusiastic about the bill than Republicans?
Answer: the big government boosters in Washington see, as the Chinese might, an "opportunity" in the financial "crisis". In the words of Vermont Socialist (his choice of labels, not mine) Bernie Sanders, "this can bring about a turn toward a new era. If we have the money to bail out Wall Street, we can provide funding for health care, childhood poverty infrastructure and sustainable energy."
I guess you can add to that list, the UAW, and probably a great grocery list of infrastructure (union boondoggle) projects. Anything else? Regardless of how long the list grows, the essential point is this: massive amounts of capital of the most scarce kind (the kind that requires the Treasury Dept. to print money) is going to be diverted to some really inefficient uses. This is no prescription for economic growth, and certainly not for any kind of bull market.
All of this begs another question, however. Does anyone in charge in Washington really care about economic growth? I'm reminded of a famous Great Depression/New Deal anecdote. Secretary Morgenthau featured a sign on his desk which asked "does it contribute to the recovery?" Upon seeing this, FDR chided him. The issue wasn't recovery, he said, "this is politics." For the feline Roosevelt, the Great Depression wasn't a crisis, it was an opportunity. As described by former WSJ editor Robert Bartley, it was, more specifically, an opportunity to replace one aristocracy with another. An opportunity to replace business as the dominant force in American life, with bureaucrats and politicians - a permanent political class in Washington.
I'm afraid that like FDR, Rahm Emmanuel - and one must assume Barry O - isn't interested in economic growth nearly as much as politics. Specifically, entrenching in Washington an even more permenant political class made up of an aristocracy of people who had a talent for taking tests as teenagers, and for little else, yet nevertheless believe themselves expert in everything and subordinate to no one outside their tribe. These twerps need people to need them, and a Reaganesque America in which opportunity abounds for anyone with talent and ambition - regardless of their SAT scores - is therefore anathema.
Rush was once fond of lecturing that the difference between us and them is that they measure policy and political success by how many people are getting government aid; while we'd measure success by how many people don't need government. It has been characteristic of the Left since the New Deal to claim, a la Professor Higgins, that we NEED them. And to prove it, they're going to kill the private economy. I hope this doesn't end the same way the Great Depression did.
Way, way back in September, weeks before the election, weeks even before I re-started this blog, I asked myself the following question: Given that most of the Democrat-installed crap had been stripped out of the $700B TARP legislation, why were the Dems nevertheless so much more enthusiastic about the bill than Republicans?
Answer: the big government boosters in Washington see, as the Chinese might, an "opportunity" in the financial "crisis". In the words of Vermont Socialist (his choice of labels, not mine) Bernie Sanders, "this can bring about a turn toward a new era. If we have the money to bail out Wall Street, we can provide funding for health care, childhood poverty infrastructure and sustainable energy."
I guess you can add to that list, the UAW, and probably a great grocery list of infrastructure (union boondoggle) projects. Anything else? Regardless of how long the list grows, the essential point is this: massive amounts of capital of the most scarce kind (the kind that requires the Treasury Dept. to print money) is going to be diverted to some really inefficient uses. This is no prescription for economic growth, and certainly not for any kind of bull market.
All of this begs another question, however. Does anyone in charge in Washington really care about economic growth? I'm reminded of a famous Great Depression/New Deal anecdote. Secretary Morgenthau featured a sign on his desk which asked "does it contribute to the recovery?" Upon seeing this, FDR chided him. The issue wasn't recovery, he said, "this is politics." For the feline Roosevelt, the Great Depression wasn't a crisis, it was an opportunity. As described by former WSJ editor Robert Bartley, it was, more specifically, an opportunity to replace one aristocracy with another. An opportunity to replace business as the dominant force in American life, with bureaucrats and politicians - a permanent political class in Washington.
I'm afraid that like FDR, Rahm Emmanuel - and one must assume Barry O - isn't interested in economic growth nearly as much as politics. Specifically, entrenching in Washington an even more permenant political class made up of an aristocracy of people who had a talent for taking tests as teenagers, and for little else, yet nevertheless believe themselves expert in everything and subordinate to no one outside their tribe. These twerps need people to need them, and a Reaganesque America in which opportunity abounds for anyone with talent and ambition - regardless of their SAT scores - is therefore anathema.
Rush was once fond of lecturing that the difference between us and them is that they measure policy and political success by how many people are getting government aid; while we'd measure success by how many people don't need government. It has been characteristic of the Left since the New Deal to claim, a la Professor Higgins, that we NEED them. And to prove it, they're going to kill the private economy. I hope this doesn't end the same way the Great Depression did.
Monday, December 01, 2008
Investment Thought of the Day
In the November 17 issue of Forbes ("The Coming Shakedown"), Bill Baldwin spells it all out. The Treasury is going to be very, very hungry. From the standpoint of a greedy, avaricious uber-state, it only "makes sense to go after those citizens who are hardworking and frugal. You can't pick an empty pocket." In short, there is going to be an attack on savings. The concept of growing our way out of the hole we're in is "no longer operative". In fact, it hasn't been since November, 2006.
What does this mean? Per Mr. Baldwin, "municipal bond coupons... will be taxed.... Retirement accounts will be looted." Most ominously, there is always inflation. What better way for debtors (U.S. government, underwater homeowners) to escape ruin than to pay creditors with inflated dollars. Conclusion: it's going to be bad to be a creditor. Or, as Mr. Baldwin concludes, "it's a bad bet to buy long dated bonds." Real estate, or even stocks, will be better. Gold anyone?
What does this mean? Per Mr. Baldwin, "municipal bond coupons... will be taxed.... Retirement accounts will be looted." Most ominously, there is always inflation. What better way for debtors (U.S. government, underwater homeowners) to escape ruin than to pay creditors with inflated dollars. Conclusion: it's going to be bad to be a creditor. Or, as Mr. Baldwin concludes, "it's a bad bet to buy long dated bonds." Real estate, or even stocks, will be better. Gold anyone?
Kill GM, Save Michigan
That was the title of a recent piece by John Tamney in IBD. It made so much sense, I had to ask myself, "would Barry O pursue such a course?" Nah. I say there's no way he let's GM go down on his watch. Letting GM die would represent such a triumph of both courage and good sense, it would be positively Reaganesque. I'm given to understand, however, that Obama is no admirer of Ronaldus Magnus. Thus I'm watching out-of-the-money calls on GM. I wouldn't touch the common. I'd go for the leverage play in a situation like this in which one little bit of good news could double the share price. Understanding, of course, that with leverage lies risk. But it doesn't hurt that gas prices are cratering.
If GM were allowed to die, maybe we'd buy a condo in East Lansing near my in-laws. Such an event would surely mark the rock bottom of the dirt-cheap Michigan real estate market. Because, as John Tamney pointed out, GM's assets would be bought up "by competent foreign automakers eager to expand their capacity in ... the world's largest auto market." Just imagine what Toyota, Honda, or Nissan might do: (a) with a wealth of assets bought on the cheap, and (b) without the UAW!
But alas, we are going to be stuck with a giant, capital-sucking sink hole, propped up for the benefit of union thugs, at the (crushing) expense of the rest of the country. I had been at least a bit sympathetic to the idea that propping up the Detroit Three was probably the best of several bad choices, due to the likely negative multiplier effects on the general economy, emanating especially from the suppliers. But I got to thinking: if the assembly capacity was bought up by competent operators, wouldn't it make more sense to use any bail out money to keep competent suppliers afloat should their cash flow positions deteriorate to near-death status in the interim? Would that not be the more efficient allocation of scarce capital?
For me, all of this mess really highlights one inescapable conclusion. Big chunks of the American economy are likely to start looking more and more like pre-Thatcher Britain. When reasonable alternatives are shunted aside in favor of throwing gargantuan sums toward, as Michael Barone put it, "preserving in amber" decaying slices of an outmoded and uncompetitive America, for the benefit of no one save powerful interest groups, I have to wonder how long it's going to be before the U.S. is called the "sick man" of something.
If GM were allowed to die, maybe we'd buy a condo in East Lansing near my in-laws. Such an event would surely mark the rock bottom of the dirt-cheap Michigan real estate market. Because, as John Tamney pointed out, GM's assets would be bought up "by competent foreign automakers eager to expand their capacity in ... the world's largest auto market." Just imagine what Toyota, Honda, or Nissan might do: (a) with a wealth of assets bought on the cheap, and (b) without the UAW!
But alas, we are going to be stuck with a giant, capital-sucking sink hole, propped up for the benefit of union thugs, at the (crushing) expense of the rest of the country. I had been at least a bit sympathetic to the idea that propping up the Detroit Three was probably the best of several bad choices, due to the likely negative multiplier effects on the general economy, emanating especially from the suppliers. But I got to thinking: if the assembly capacity was bought up by competent operators, wouldn't it make more sense to use any bail out money to keep competent suppliers afloat should their cash flow positions deteriorate to near-death status in the interim? Would that not be the more efficient allocation of scarce capital?
For me, all of this mess really highlights one inescapable conclusion. Big chunks of the American economy are likely to start looking more and more like pre-Thatcher Britain. When reasonable alternatives are shunted aside in favor of throwing gargantuan sums toward, as Michael Barone put it, "preserving in amber" decaying slices of an outmoded and uncompetitive America, for the benefit of no one save powerful interest groups, I have to wonder how long it's going to be before the U.S. is called the "sick man" of something.
Today's Andrew Jackson Lesson
Today on Michael Medved's show a very informed (he said he was a history teacher) caller raised a point concerning Indian Removal which I had never before encountered in all my reading on this subject. The caller pointed out that because of the very real threat that existed, even in the 1830s, of secession, Jackson felt it was paramount that he do whatever may be within his power to make sure that the ringleader, South Carolina, remained isolated. Hence, Removal as a policy was advanced largely as a sop to Georgians who were anxious to "remove" the Indian threat from their midst.
I think this is a point worth considering. Although it is certainly accurate, as Jon Meachum has said, that Jackson's Indian policy can be explained, but never justified, Jackson, like Lincoln, placed preservation of the Union above all other interests and considerations. Thus I believe it is likely that, had Jackson any notion that pursuing Removal would keep Georgia in the Union camp, that would have been enough reason right there.
I think this is a point worth considering. Although it is certainly accurate, as Jon Meachum has said, that Jackson's Indian policy can be explained, but never justified, Jackson, like Lincoln, placed preservation of the Union above all other interests and considerations. Thus I believe it is likely that, had Jackson any notion that pursuing Removal would keep Georgia in the Union camp, that would have been enough reason right there.
Tom McClintock Declares Victory
Placerpundit was able to attend Tom McClintock's press conference today at which he declared victory in the very, very closely contested 4th Congressional District. Placerpundit would stress first and foremost, in this summary, that Congressman-to-be McClintock was extremely gracious in victory, due undoubtedly in part to his experiences on the losing side of hard-fought races. He emphasized that opponent Charlie Brown ran an excellent campaign, and that he and his supporters are clearly sincere and genuine in their beliefs and motivations. Placerpundit notes that this has been a consistent theme throughout McClintock's comments following election day.
McClintock also made a point of thanking outgoing Congressman Doolittle for his help in facilitating the transition.
With respect to legislative philosophy, McClintock's theme was simple: uphold the principles of the founders. Obviously, this means as many different things as there are people who would ponder on it. However, to the extent McClintock may not be a known quantity in some quarters, a couple of remarks in response to press questions were instructive. Asked what he thought the incoming administration might do to stimulate the economy, he sounded a pitch-perfect Reaganesque tone: "get government off our backs". He later elaborated this philosophy by noting, right out of Thomas Sowell, that government doesn't create any wealth - it only redistributes.
This latter point is worth expanding upon. Obviously, it is another way of saying "you can't spend your way to prosperity". One of the Left's great frauds is suggestion that if the wise of Washington could just have a chance to direct national wealth in a more enlightened way - and oh how easy it would be to be more enlightened than the marketplace - greater prosperity could be achieved. Such is to say, in effect, "government is efficient", because government is wise, and populated by people who are not only smart, but uniformly public-spirited. May I say, "what a crock"?
McClintock's point on this score was to note what commense sense should make plain: it is a very tricky business to suppose that by taking money from one bucket and putting it in another, a central government can increase the sum of society's wealth as it by definition thwarts the will of the marketplace.
Based on his remarks, and McClintock's history as a fiscally responsible free market conservative, Placerpundit expects Congressman McClintock to be a fresh voice for a new Republican brand that will not easily suffer fiscally irresponsible, central-planning based solutions.
McClintock also made a point of thanking outgoing Congressman Doolittle for his help in facilitating the transition.
With respect to legislative philosophy, McClintock's theme was simple: uphold the principles of the founders. Obviously, this means as many different things as there are people who would ponder on it. However, to the extent McClintock may not be a known quantity in some quarters, a couple of remarks in response to press questions were instructive. Asked what he thought the incoming administration might do to stimulate the economy, he sounded a pitch-perfect Reaganesque tone: "get government off our backs". He later elaborated this philosophy by noting, right out of Thomas Sowell, that government doesn't create any wealth - it only redistributes.
This latter point is worth expanding upon. Obviously, it is another way of saying "you can't spend your way to prosperity". One of the Left's great frauds is suggestion that if the wise of Washington could just have a chance to direct national wealth in a more enlightened way - and oh how easy it would be to be more enlightened than the marketplace - greater prosperity could be achieved. Such is to say, in effect, "government is efficient", because government is wise, and populated by people who are not only smart, but uniformly public-spirited. May I say, "what a crock"?
McClintock's point on this score was to note what commense sense should make plain: it is a very tricky business to suppose that by taking money from one bucket and putting it in another, a central government can increase the sum of society's wealth as it by definition thwarts the will of the marketplace.
Based on his remarks, and McClintock's history as a fiscally responsible free market conservative, Placerpundit expects Congressman McClintock to be a fresh voice for a new Republican brand that will not easily suffer fiscally irresponsible, central-planning based solutions.
Quote of the Day
"It is a mistake to look too far ahead. Only one link in the chain of destiny can be handled at a time."
Winston Churchill
"In the long run, we are all dead."
John Maynard Keynes
Winston Churchill
"In the long run, we are all dead."
John Maynard Keynes
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