David Anderson Financial Planning, LLC

Capital On Strke . . . at the margin

2011-09-02T09:30:30Z

The jobs report this morning goes to the heart of our economic problems. At the margin, capital is playing it safe. Stated another way, people are unwilling to invest their savings (capital) because they are afraid that the profits will be unduly taxed, reduced by regulatory fiat or inflated away by money printing. Until there is a sign of dramatic changes in the regulatory, monetary and fiscal structures, no amount of tinkering around the edges will succeed. In most cases, the tinkering will be counterproductive.

Nobel Laureate (the good guys do win sometimes) Gary Becker in today’s Wall Street Journal summarizes the issues perfectly. After pointing out that government was a leading cause of the “Great Recession” he goes on to point out that a misdiagnosis of the problem by economists led to the wrong prescription and treatment. For my purposes the key paragraph is:

“Congress did manage to pass badly designed laws concerning financial markets, consumer protection and medical care. Although regulatory discretion failed leading up to the crisis, Congress nevertheless added to the number and diversity of federal regulations as well as to the discretion of regulators. These laws and the continuing calls for additional regulations and taxes have broadened the uncertainty about the economic environment facing businesses and consumers. This uncertainty decreased the incentives to invest in long-lived producer and consumer goods. Particularly discouraged was the creation of small businesses, which are a major source of new hires.”

As stated earlier, the economy (and job creation) will remain tepid until entrepreneurs and capital holders have some confidence that the return on their savings (as well as the return of their savings) will not be taxed away, regulated away or inflated away.

In a world where the description is almost an oxymoron, I regard Gary Becker as one of the most thoughtful economists in the world. You can read his blog (along with Richard Posner) at www.becker-posner-blog.com.

Are We There Yet?

2011-08-10T11:50:05Z

Doug Kass has been quite prescient at calling bottoms in the market. His latest missive is well reasoned as always. I suspect that we have hit an intermediate low and should rally back toward the 200 day moving average of the various market indices. For the Dow Jones Industrial Average the 200 day moving average is around 12,000 versus the current level of 10,825 as I write.

While I am not as sanguine as Mr. Kass about avoiding a “re-test” of the lows established this week (although this morning’s action may qualify), I do think the next 1,000 point move will be on the upside. After that we will have to see if any progress is made on the current “wall of worry” which includes:

Potential insolvency of European banks impacting our financial system. I think much of the selling of U.S. stock over the last couple of weeks has come from European banks that need to raise capital. At some point they either run out of stocks to sell or have enough capital.
Washington’s inability to deal with the deficit. As I have written previously, S&P’s downgrade of the country’s credit rating was an “emperor’s new clothing” moment. The U.S. has been partially defaulting on the purchasing power of their bonds for 40 years. Unfortunately, savers will continue to have their purchasing power confiscated. The Federal Reserve’s announcement yesterday says they will continue the zero interest rate policy. When one couples that with the Fed’s stated goal of 2% “headline” CPI growth then savers will be contributing 2% of their purchasing power to debtors each year.
Slow economic growth and even recession fears. Economic production ought to accelerate in the second half of the year due to the easing of the bottlenecks created by the critical parts shortage as a result of the Japanese earthquake.

For the market to go to new highs we will need to see the federal government pull back from the growth inhibiting policies that are currently in place—from a monetary, fiscal and regulatory basis.

Stealth Default

2011-08-03T16:37:38Z

There has been much discussion recently about the potential for the United States to go the way Greece and other banana republics by defaulting on U.S. Treasury debt.

I submit that the U.S. has been in stealth default mode for the last 40 years. Conservatively measured by the Consumer Price Index, the dollar has lost 82% of its purchasing power since August, 1971. If one were to measure it in dollars per ounce of gold (real money) the devaluation has been much more severe.

Regardless of the measure used, the U.S. Treasury borrows dollars and then repays with dollars that have lost purchasing power at an average of 4.4% per year over the last 40 years. This loss of purchasing power is a stealth default of 4.4% per year.

Inflation as measured by the Consumer Price Index has been lower over the last ten years at 2.4% per year but has recently accelerated to 3.56% (year over year percent change of the all urban CPI non-seasonally adjusted).

Anyone who thinks the U.S. does not default on its obligations is engaging in self-deception.

Of Debt Ceilings & Bond Ratings

2011-07-28T15:11:47Z

The most serious economic issue right now is the possibility that bond ratings for U.S. Treasury debt is downgraded by Standard & Poor’s and/or the other ratings agencies. There would be chaos in the financial markets if the ratings are downgraded and the entities that rely on those ratings have to act on the downgrades.

After the last financial debacle, representatives of the ratings agencies were hauled before Congress and excoriated not only for their failure to anticipate the last crisis, but also for aiding and abetting the perpetrators (Fannie Mae & Freddie Mac).

Now the chickens have come home to roost for Congress. Standard & Poor’s is anticipating the next crisis and is no longer willing to aid and abet the perpetrators (a.k.a. the Congress). S&P has put debt issued by the U.S. Treasury (issued to cover Congress’ manic spending habit) on watch with a possibility of downgrade. I wonder if members of Congress wish they had been a little nicer to the ratings agency representatives in those hearings. Maybe S&P wouldn’t feel the need to be so proactive.

Every few years it seems that the Kabuki drama regarding the debt ceiling plays out. There is much angst and hand wringing by the political elite but they finally increase the debt ceiling and go on merrily spending. Right now the airwaves are filled with discussions of how much Congressional leaders will pretend to cut spending in order to get the votes necessary to raise the debt ceiling and (maybe) avoid a bond rating downgrade.

Unfortunately, the debate is not about spending cuts. Government programs are immortal – even after their purpose ends (look at the International Monetary Fund; its purpose ended in 1971 yet on it goes). When Congress talks about spending cuts they are talking about slowing the growth of spending.

The White House’s fiscal year 2012 budget summary at www.whitehouse.gov reports that the federal government will spend $3.819 trillion this fiscal year (2011). Next year they actually expect outlays to decline by $90 billion. In fiscal 2013 they expect outlays to grow by $42 billion. So far so good.

However, beginning in 2014 they expect government outlays to increase by an average of $241 billion dollars per year for the next eight years. For the ten years through 2021 the government would spend $45.95 trillion. From 2013 to 2021 that represents a 5.3% compound annual growth rate.

On the other hand, if Congress were to keep the annual outlays level at $3.819 trillion for the next ten years then they would only spend $38.19 trillion over that ten years. So they are hoping to increase spending by $7.76 trillion during the ten year period.

Currently, the various players are trying come up with ways to reduce that $7.76 trillion increase by a trillion or so (are we adding up to real money yet?) in exchange for the votes to increase the debt ceiling. However, the debt ceiling is the small, irritating problem that diverts attention from the real issue (even if the debt ceiling increase is delayed there are ways for the government to carry on without playing the Armageddon card--recall what was said about government programs earlier).

Here is the real problem: Standard & Poor’s is saying that they want to se a substantive plan to reduce the $7.76 trillion increase by approximately $4 trillion (to $3.76 trillion) or they will feel the need to downgrade the bond rating of the U.S. Treasury.

Suppose Congress really wanted to reduce the increase in spending to $3.76 trillion over the next ten years. To accomplish that goal they would have to hold the rate of increase down to 2.9% per year for the years 2013 to 2021. Mathematically that would still give them an extra $3.76 trillion to play with over the next ten years. However, they still have to account for the increases that will be required for Social Security and Medicare payments to retiring baby boomers.

According the White House budget summary, Social Security, Medicare, Medicaid, and “other mandatory programs” will require an increase of $3.94 trillion over the ten year period. Oops! If those promises are honored in their current form, then the rest of the government would have to shrink slightly for the next ten years. By the way, of the mandatory increases of $3.94 trillion, Social Security and Medicare are estimated at $2.53 trillion.

Is there a way out of this mess? Probably not until the next national election. My guess is that the 2012 elections will either set us on the course to fiscal responsibility or the path to fiscal destruction.

In the meantime, what happens? Congress will come down to the wire and find a way to increase the debt ceiling. However, they won’t meet the amount set forth by Standard & Poor’s for spending reductions. What they could do is eliminate the need for banks, pension funds, municipalities, etc. to rely on the ratings agencies. Congress gave the ratings agencies their legitimacy; they can take it away as well. Obviously this “solution” does not deal with the substance of the issues but it might paper things over until the next election . . . and that’s all the politicians care about anyway.

To summarize:

2011 Federal Government Outlays: $3.82 trillion

Ten years of spending at $3.82T $38.2 trillion

White House Projections of ten year outlays: $46.0 trillion

Total spending increase over ten years $7.8 trillion

Reduction of the increase requested by S&P $4.0 trillion

Resulting ten year spending increase $3.8 trillion

Amount needed for "mandatory program growth" $3.9 trillion

Amount left for Congressional discretion: Nothing

Maybe the rest of the country wins after all.

Entrepreneurs Unshackled?

2011-07-14T19:04:30Z

Hopefully you have been able to glean from this blog that I think the biggest enemy of the economy and the stock market right now is the incredible burden of regulation and tax rules that businesses must bear. At the margin it has crippled small business expansion as well as the propensity for investors to put capital into new business start-ups. Thus, we have had a jobless recovery in the U.S. because the majority of new jobs come from small business.

I never expected to see a credible challenge to the Congress' power to micro-manage the economy. This article in the Wall Street Journal, entitled "A Gun Activist Takes Aim at U.S. Regulatory Power," describes such a challenge and gives a short history of how the Supreme Court validated the incredible expansion of Congressional regulatory power in the last 70 years. Needless to say, I am in the camp that views this assumed regulatory power as unconstitutional. It wouldn't be the first time the Supreme Court has been wrong. Also, if they overturn their previous decisions, it wouldn't be the first time that they did the right thing after doing the wrong thing. A portfolio manager I worked with always said "It's never too late to do the right thing".

Should this case put a dent in the every expanding regulatory structure of this country, then I believe the economy would accelerate dramatically as entrepreneurs and investors would engage in a frenzy of new business creation . . . much like we saw in the 1980's and into the 1990's.

Such growth would take care of any government debt and unfunded government liability issues.

By the way, email me if this article is "subscriber only" content. The WSJ has a facility for subscribers to email specific articles to other people.

America's Troubling Investment Gap

2011-07-05T12:40:23Z

In today's Wall Street Journal, David Malpass and Steve Moore discuss the fact that more capital is flowing out of the United States than is flowing into the United States. Capital is necessary to create jobs. When capital is taxed at a rate that is too high or is regulated too strenuously then it will flow to other countries that do not treat it as harshly. The jobs that capital would create also flow to other countries. This is why we have a relatively jobless recovery.

As a nation we need to do two things. First, we must come to the realization that jobs are created by entrepreneurs and not government. Second, we must convey that realization to our elected representatives at all levels. Until governments get the message, the U.S. economy will continue in its slow growth mode.

Having said that, I still believe there will be a mild acceleration in the last half of the year as U.S. businesses work around the supply disruptions caused by the Japanese earthquake and tsunami. Beyond that we will fall back to a slower growth rate unless there are policy changes.

Are We Headed for Another Recession?

2011-06-15T11:48:59Z

The talking heads in New York and Washington have been wringing their hands over the economic statistics that suggest a slowdown in the U.S. economy. As I wrote last fall, some slowdown was inevitable. Many in the U.S. have the discretion to schedule when they receive income. With tax rates slated to increase on January 1st, some moved 2011 income into the fourth quarter of 2010 so it would be taxed at a lower rate. The corresponding economic activity was also moved from the first quarter to the fourth quarter. Thus the fourth quarter’s economy appeared stronger and the first quarter’s appeared weaker than they otherwise would have been.

As we were working through that transition the earthquake hit Japan. Japanese industrial production plummeted 15% in one month (economists begin to panic when U.S. industrial production declines by 0.5% in one month). Like U.S. companies, Japanese companies have shifted high volume production to other parts of Asia. However, again like U.S. companies, the Japanese companies retained production of critical components at home (Japan in their case). Some of these components are also exported to the United States. As a result of the earthquake supplies of critical parts bound for the U.S. have been disrupted. So while a manufacturer (or repair service) may be able to get all the high volume parts they need, production may be halted until alternative sources of key components can be arranged. Once those alternative sources of supply are found the economy ought to go back to muddling along.

Businesses are still faced with very high levels of uncertainty regarding regulations, tax policy and monetary policy. So few are willing to commit capital to a project unless it is close to a “sure thing” . . . other projects need not apply, nor should workers for those marginal projects. Until the fog emanating from Washington clears, capital will remain parked on the side of the road . . . and so will the unemployed workers who would go along for the ride. Thus, we are still in for a slower than normal recovery and relatively high levels of unemployment.

As the economy slowed from the supply shock, investors have reduced their exposure to stocks. The correction in the stock market should end when enough investors come to the conclusion that the current slow down is temporary and the economy will gently accelerate back to “muddle through” levels in the second half.

The economic slowdown also decreased business demand for working capital. Those excess funds probably found their way into government bonds which drove down intermediate and long term interest rates. When the economy mildly accelerates some of those funds will come out of the bond market and be used to fund the economy. Interest rates will resume their rise. As a result bond mutual funds may not perform as well in the second half of the year as they did in the first half.
The next few weeks may be a good time to ensure that your portfolio’s asset allocation is in line with your long term strategic allocation decision.

Another Nail in the Keynesian Coffin

2011-05-09T11:41:19Z

In this piece from Real Clear Markets, Louis Woodhill shows that all tax cuts are not created equal. As he points out, tax cuts to stimulate "demand" (as if demand needed stimulation) are always dismal failures. We learned this (again) with the 2001 "stimulus" attempt. It wasn't until the 2003 cut in marginal rates that the economy began to accelerate out of that recession.

As I pointed out last fall, the economy was destined to slow in the first quarter because it took the president and Congress so long to agree on delaying the scheduled tax increases. High income earners exercised their ability to advance income into the fourth quarter to avoid the higher taxes scheduled for January 1st. The higher rate of GDP growth in the fourth quarter borrowed from the first quarter's growth.

The major constraint on the economy is not the marginal tax rate or monetary policy. It is the ever tightening noose of regulation. While confident that economic regulation will become more stringent, entrepreneurs and investors are uncertain about the timing and content of new regulations. Thus, they elect to sit on their capital rather than invest it in new or growing businesses. This was the problem in the 1930's and the 1970's. Until something changes on the regulatory front, the economy will limp along and not produce a significant amount of new jobs. For an extreme example of this phenomenom see John Tamny's Forbes column from last week.

A slow growth environment favors "growth" companies that are innovative and creating new products/markets. For investors with shorter time horizons, it also favors careful attention to valuation and expected rates of return.

Addendum to S&P Outlook Change

2011-04-18T10:19:45Z

If the U.S. debt is downgraded at some future date, it would be the logical conclusion (hopefully a conclusion) of the U.S. leaving the gold standard for good in 1971. The gold standard imposed discipline on both ends of Pennsylvania Avenue and by extension it imposed discipline on citizens feeding at the public trough.

Now, the only source of discipline comes from the bond market vigilantes. As noted below, the bond market vigilantes have been neutralized by the Fed's massive purchases. It will be interesting to see what happens when those purchases end.

S&P Cuts U.S. Bond Ratings Outlook to Negative

2011-04-18T09:39:49Z

Everyone, including the U.S. government has been critical of the bond ratings agencies for not only failing to warn about the impending mortgage crisis a few years ago, but also continuing to rate the toxic bonds as AAA. Be careful of what you wish for; the ratings agencies are now more proactive.

This morning Standard & Poor’s shifted the outlook for the AAA rating of the United States to negative.

As reported in the online edition of the Wall Street Journal, "'More than two years after the beginning of the recent crisis, U.S. policy makers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,' S&P credit analyst Nikola G. Swann said. He said the rating agency puts the chance of a U.S. downgrade within two years at least one-in-three."

As pointed out by Austan Goolsbee, chairman of the president’s Council of Economic Advisors, the bond market does not seem to be too concerned about the debt rating since interest rates are very low.

I would submit that rates are low because the Federal Reserve continues to purchase the majority of new debt being issued. One of the oldest adages on Wall Street is "don't fight the Fed". As long as the Fed is massively buying, rates will remain low. However, those purchases are scheduled to end in June. It remains to be seen whether the bond market vigilantes will reprise their 1980’s and 1990’s role in bringing discipline to Pennsylvania Avenue.

The yield to maturity on ten year Treasury bonds has increased to 3.44% this morning from a low of 2.41% last fall and from 2.11% in December, 2008, at the worst of the crisis.

Eyeballing the chart below suggests to me that the bond market vigilantes will have assumed the upper hand if and when the ten year yield gets above 4%.

How to Pay No Taxes

2011-04-15T10:17:10Z

The cover of last week's Bloomberg Businessweek magazine illustrates why increasing marginal tax rates on those with high incomes is ineffective. The title of the article is "How to Pay No Taxes". The teaser is "11 shelters, dodges, and rolls--all perfectly legal--used by America's wealthiest people".

Paying taxes comes down to a cost/benefit analysis for high income tax payers. When marginal tax rates are relatively low its more cost effective to pay the taxes. When marginal tax rates are high its more cost effective to hire lawyers and accountants to employ these and other "shelters, dodges, and rolls" rather than pay the tax.

Dr. Arthur Laffer wrote an op-ed in the Wall Street Journal a couple of years ago showing that since 1980 the top 1% of household incomes have paid essentially the same effective tax rate year in and year out, regardless of changes in income or marginal tax rate.

The real problem is not the missing tax revenue when marginal rates are high. The problem is the misallocation of capital caused by the high marginal tax rates. Capital that could be employed by capital hungry businesses is diverted into tax avoidance schemes. Capital hungry businesses produce jobs and create wealth for both investors and employees. Tax shelters enable the rich to keep some income, but are ineffective as a use of capital.

Equity Bull Rally Is Just Pausing for Breath

2011-03-24T13:10:15Z

I have always regarded Lazlo Birinyi is one of the savviest investors around. So I take note when an article like this one in the Financial Times appears. As he notes in this article, the gist of what you hear from financial press is tilted to the bearish side. It doesn’t help that I keep hearing radio commercials directing me to watch an Internet video about the end of America that Barron’s called a “dire prophecy”. I haven’t watched the video so I don’t know whether it is a dire prophecy that also makes sense. However, I always think Mr. Birinyi makes sense and would be highly uncomfortable ignoring his advice.

By the way, I recently discovered that his firm publishes a retail version of their institutional service. You can learn more at www.birinyi.com.

How Taxpayers Subsidize March Madness

2011-03-23T15:38:51Z

I'm a big college basketball fan. As a result, March is one of my favorite times of the year. I have to say that I am crushed to learn that the big time college athletic programs are taking advantage of the tax code to make even more money. Steve Malanga details just how this works.

He concludes by saying,

"I suppose it's possible for most of us, including the President of the United States, to brush aside the hypocrisy and enjoy, even celebrate, March Madness because our tax code has become so complex and so filled with special interest giveaways that we'd be virtually paralyzed if we tried to arrange our life in a way that protests every deception and every exploitation of the code.

"Still, you have to wonder what prospect we have for serious special interest reform in Washington when every year an event like March Madness, which pretends to be an amateur event and which operates so lucratively by exploiting loopholes in our tax code designed for educational purposes, is celebrated as some national rite of spring."

As an aside, much of what he quotes comes from an Indianapolis Star article on the subject. With treatment like that from their home town newspaper, maybe the NCAA will consider moving back to Kansas City.

Ben Bernanke's 70's Show

2011-02-07T13:54:49Z

Professor Allan Meltzer is exactly right in his WSJ op-ed piece concerning the misguided policy of the Federal Reserve Open Market committee. He correctly notes that the underlying philosophy of the Fed is based on the Phillips Curve which has been adapted to show that there is a trade-off between inflation and unemployment. They believe that high inflation begets low unemployment; hence their desire for higher inflation. The history of the 1970's as well as the 1980's and 90's disproves that hypothesis.

Professor Meltzer diagnoses the current problem when he says, "Current slow growth and high unemployment is not mainly a monetary problem. The financial system has more than ample liquidity. Uncertainty about government policy is a much bigger problem. Businesses have had many reasons to be uncertain, to wait for a clearer outlook that would permit them to more accurately estimate future costs and returns to new investment. Better to hold cash and wait."

He concludes by saying: "What we need out of Washington now is spending reduction, lower corporate tax rates, and a three-year moratorium on new regulation. But perhaps most importantly, we need a new Fed policy to prevent 1970s-style inflation. Inflation is coming. Now is the time to head it off."

Ronald Reagan at 100

2011-02-07T13:42:40Z

I consider Ronald Reagan the best president in the 20th century. No one writes about him better than Peggy Noonan.

Regarding his nickname, "the great communicator", she notes a statement out of his farewell address:

"I never thought it was my style or the words I used that made a difference: it was the content. I wasn't a great communicator, but I communicated great things."

She goes on to say, "It wasn't his eloquence people supported, it was his stands—opposition to the too-big state, to its intrusions and demands, to Soviet communism. Voters weren't charmed, they were convinced."

The Real Story of Obama and Corporate America

2011-01-29T10:15:48Z

Last week I highlighted the op-ed by President Obama that stated the need for regulatory reform in the United States. I called it "the most bullish thing for the economy and the stock market that I have seen in recent years" if the Congress and federal bureaucracy were to follow through on it.

Noam Scheiber, writing on The New Republic website, deflates my expectations somewhat. In this piece Mr. Scheiber essentially reassures President Obama's base supporters that the recent overtures to business were about form and not substance. Mr. Scheiber concludes that the response by big business shows that they are easily co-opted and that the administration will have no problem getting on with its original agenda.

The mistake that Mr. Scheiber makes is to view businesses as monolithic. I submit that big business prefers and benefits from big government. That's why we have such a monstrous tax code and regulatory apparatus. Small businesses that want to grow up to be big businesses are the ones primarily harmed by the tax code and regulatory situation. That is why we have had a subpar recovery: the refusal of small businesses to invest and hire for expansion. I also submit that small business owners were the primary impetus behind the change in the makeup of Congress. If the president's call for regulatory reform are mere words then the economy will continue to limp along because there are better uses of capital than expanding one's business.

The Latest American Export: Inflation

2011-01-18T12:22:48Z

Having taken a dig at the Federal Reserve in the previous policy, I thought I would “pile on” by highlighting another op-ed piece in the Wall Street Journal by Professor Ronald McKinnon from Stanford University. He is “spot on” that the Federal Reserve’s monetary errors have magnified repercussions around the world. Monetary policy is (hopefully) the last bastion of central planning. The sooner we put this experiment in central planning behind us, the better off we and the rest of the world will be.

Toward a 21st Century Regulatory System

2011-01-18T12:13:45Z

This Wall Street Journal op-ed piece by President Obama is the most bullish thing for the economy and the stock market that I have seen in recent years. If the vast federal bureaucracy and the Congress will follow through and make his initiative to rationalize our regulatory system a reality it would greatly enhance the prospects for economic growth and full employment at reasonable wages while keeping corporate profits at a high level. The combination of the latter two factors would go a long way toward solving our federal budget deficit problem as well.

The only thing more bullish would be to wake up and read an op-ed piece by Chairman Bernanke (of the Monetary Central Planning Committee) that henceforth the FOMC would allow markets to set short term interest rates and that the FOMC would instead focus on maintaining the stability of the dollar.

There Is No Getting Around Gold

2011-01-13T10:09:38Z

As part of the economic elite's attempt to repeal the law of supply and demand, they have ferociously fought the gold standard. Instead they substituted the judgment of central planning committee over the judgment of millions of market participants.

As we saw with oil in the 1970's and other failed attempts at central planning, it is impossible to repeal the law of supply and demand. The monetary policy failures over the last 40 years are the result of refusing to monitor the dollar value of money. By money, I don't mean dollar bills. Over 4,000 years of history shows that gold is money; paper currency was contrived as a convenience. However, paper currency has become the tail that wags the dog.

Jeffrey Bell and Rich Danker label the monetary experiment of the last 40 years for what it is: "a stupendous failure". The monetary emperors have no clothes. Anyone who has dared to state that obvious fact has been designated a "crank" or worse.

There are two basic reasons that I can see for the resistance to a gold standard. The first is the discipline that it places on politicians (and by extension the electorate). Lack of political (and monetary)discipline brought us the Great Debacle of 2008 (as well as the previous post 1971 busts). The second reason is that profits generated by the big banks from trading foreign exchange must be immense. The notional values traded are certainly immense. The trades wouldn't happen if they weren't profitable.

Until we return to a gold based monetary discipline we are doomed to repeat the past. The real problem is that our foreign creditors may have already begun to opt out of financing our excesses. We will know that we have truly achieved "banana republic" status when we have to finance our national debt in bonds denominated in other currencies.

Byron Wien's "The Ten Surprises for 2011"

2011-01-04T10:53:44Z

Each year Byron Wien formulates his Ten Surprises for 2011. My sense is that his batting average is fairly good on these predictions.

The top two surprises are for the economy to grow 5% and a rise in the ten year Treasury yield to maturity to 5% from the year end level of 3.30%.

I am not as exuberant on the economic outlook. Yes, we have the positive effect of extension of the Bush tax cuts, but the extension is only for two years and constitutes the absence of a minor negative. Capital investment by business has a life of 3 years to 50 years. So the extension only reduces the period of uncertainty by a fraction.

We also have a regulatory environment that is getting more onerous. What the Democrats in Congress could not accomplish legislatively over the last two years will now be attempted by the regulatory agencies over the next two years. As an example, an editorial in yesterday's Wall Street Journal details how EPA actions "have brought major [energy] projects in the U.S. to a standstill . . . The EPA concedes that some 167 current projects will be affected, and many more in the future. Our guess is that all of them will be delayed for years and many will simply die."

Businesses making capital investments have to make assumptions about the future. It is still very difficult to make assumptions about the future due to the fog surrounding tax rates and the regulatory environment. Capital investment by business drives the long term growth of the economy. So I still believe that economic growth will remain subpar until the tax situation and the regulatory situation become clearer.

Shadow Over Asia

2010-11-26T09:39:22Z

In John Mauldin's weekly email, Outside the Box, he reproduces an interview from the investment newsletter, The Casey Report. The interview is with Vitaliy Katsenelson, the chief investment officer of Investment Management Associates, Inc. As the title implies, the interview lays out the long term bearish cases for both China and Japan and the ripple effects these will have on the rest of the world.

The bearish case for China is that a managed economy cannot compete with a free market economy over the long term. China is currently showing good economic growth, but that growth is the result of building too many of "bridges to nowhere". Their economic managers direct investment on the basis of their perceptions rather than market needs and signals. To mix metaphors, when the music stops, it won't be pretty.

The bearish case for Japan is based on the fact that they will have to move from internal financing of their gargantuan public sector debt to relying on external financing. This will change the dynamics of their situation drastically.

The Federal Reserve Open Market Committee (FOMC) has directed much of their effort to keep the U.S. from repeating the experience of Japan over the last 20 years. The key difference is that the U.S. Treasury debt is already externally financed to a large degree. So the discipline of the market place will come much sooner to the U.S. than it has to Japan.

The linked article is rather long, but well worth reading.

What's Really Behind Bernanke's Easing?

2010-11-19T09:11:44Z

The Fed's actions have mystified (putting it kindly) many observers. David Goldman wrote in his blog this week, "In forty years of watching financing markets, I have seen nothing like the global jeer at the Fed’s proposed quantitative easing–not, in any case, since the US de-linked the dollar from gold in 1971." Why has the Fed been willing to subject itself to such villification at home and abroad?

Today Andy Kessler put into words what I have feared since QE2 was announced back in late August. Chairman Bernanke may know something we don't know. "Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks. . . . Like it or not, banks are still weak, and another panic may be on its way."

'Buy and Hold' Is Still a Winner

2010-11-18T17:27:10Z

Burton G. Malkiel, author of A Random Walk Down Wall Street, explains why long term investing is not dead. He uses the term "buy and hold" in the title, but that is really a misnomer. As he explains in the op-ed piece, the key is to rebalance one's portfolio periodically. I agree with his recommendation that rebalancing be done annually.

He also stresses the use of low cost, passive index funds. Morningstar's own studies have shown that the best predictor of a mutual fund's long term performance is the level of its fee: The lower the fee, the better the long term performance versus funds within its category.

How the Republicans Can Fulfill Their Pledge

2010-11-04T11:42:34Z

After reading Chairman Bernanke's op-ed piece and commenting about that (see previous entry), it was a breath of fresh air to read Congressman Paul Ryan's op-ed piece in the Financial Times of London.

My sense is that Congressman Ryan knows how the world works. The solution to our problems in the short term is economic growth. Economic growth comes from allowing producers to produce. The long term solution will come from slowing the growth of government. He seems to have workable solutions for that as well.

I try to avoid getting political in this blog, but the economy is the hostage of governmental policies. Historically, the establishment Republicans (what I call root canal Republicans) have been championed policies that keep the economy hostage. It will take pro-growth Republicans and similar minded Democrats coming together to pass legislation in the House that will lower the obstacles to economic growth (see previous posts) . . . even if that legislation fails in the Senate or is vetoed. If they don't live up to their promises, the House of Representatives will see another 60 seat shift in 2012.

What the Fed Did and Why

2010-11-04T11:09:09Z

Ben Bernanke, Chairman of the Federal Reserve Board, has written an op-ed piece in the Washington Post explaining why the Fed feels that "quantitative easing" is necessary in this environment.

"Quantitative easing" means that they will purchase an additional $600,000,000,000 of longer term Treasury securities (that's $600 billion; its always more impressive to print the zeros so you can compare it to your net worth) . That's on top of the $1,000,000,000,000 ($1 trillion) they purchased over the last two years. The first trillion is known as QE1 and the coming $600 billion as QE2. Using the abbreviations, QE1 and QE2, the numbers don't seem as alarming.

How can they do that? Where do they get the money for those purchases? They create it. It's the ultimate credit card that never has to be paid back . . . except that our current creditors (read China) are taking a look at this and projecting that the purchasing power of the Treasury securities that they already hold will be diminished greatly. As an example, if they used 146 yuan to purchase a $1,000 of Treasury securities, in the future they may only get back 122 yuan when those securities mature. How would you like to tell the head of the Chinese government that you lost 17% on a supposedly safe investment? If I were the Chinese monetary authorities I would be first in line to sell Treasury securities back to the Fed. Then I would use the dollars received to purchase non-dollar denominated assets. At a minimum, it might be a career saving experience; failure is not taken lightly in China.

What was the situation when they did QE1? The banks were at risk of insolvency because the "mark to market" accounting standards and Sarbanes-Oxley regulations forced the banks to value their assets at distressed levels, far below their economic value. No one knew which banks might be declared insolvent in the next 24 hours so no large financial transactions took place. As a result, economic activity took a holiday. Unfortunatley, 10% of the work force is still on "holiday".

When the "mark to market" rules were suspended in March, 2009, the stock market bottomed and the economy bottomed three months later. The recovery was not driven by the $1,000,000,000,000 (QE1) that the Fed created and put on the balance sheets of the banks. What drove the recovery was the assurance that the banks would not go out of business plus the fact that businesses had slashed inventories so dramatically in the fourth quarter of 2008 that they had to start rebuilding them.

Why then has the recovery been so slow compared to previous recoveries? This recovery has been slow because the obstacles to economic growth have been rising. Why would anybody commit capital and hire employees when they don't know what the rules will be in the future? Tens of thousands of pages of regulations are yet to be written for the health care and financial sectors. There is the prospect of "cap and trade" generating tens of thousands of pages on energy. Granted, the prospect of "cap and trade" is diminishing with the recent election. However, that means the EPA will write the rules without legislative debate. Oh by the way, tax rates are scheduled to increase significantly in 2011 and in 2013 on any income generated by the additional capital employed to hire workers and grow revenues. Is it any wonder that businesses at all levels are surveying the situation and keeping their wallets in their pockets. (Having said that the fourth quarter GDP statistics will look good as people bring forward income into 2010 to avoid the higher tax rates in 2011).

The first QE1 was to combat a liquidity crisis. We don't have a liquidity crisis now. The banks are flush with reserves (ten times more than they had in 2008 thanks to QE1). Big business has high levels of cash. Small businesses, for the most part, are unwilling to expand and thus don't need to increase borrowing. Those businesses that are desperate to borrow are hoping to cover their operating losses. Banks don't loan money to cover operating losses. Only governments do that. So the banks are still sitting on that first trillion from QE1. How will another $600 billion change things?

Issuing dollars to stimulate an economy made sluggish by regulatory paralysis and higher tax rates is counterproductive. All it will do is decrease the purchasing power of the dollar and encourage holders of dollar denominated capital to diversify out of the dollar into safer havens for wealth. There will be two results: (1) we will have accelerating price increases which are the most regressive tax of all; and (2) capital will leave the country and jobs will be created overseas.

Some will argue that with impending gridlock in Washington, monetary policy is the only tool we have. I have never been able to repair something using a hammer when the job called for a screwdriver.

That brings me to the last question. Why is the stock market going up as I write this? The conventional wisdom on Wall Street for the last 100 years has been “never fight the Fed”. The Fed has stated that their goal is to increase asset prices, including stock prices. As long as the Fed is buying, professional money managers will be buying (with your 401(k) dollars).

The Best of Times, The Worst of Times

2010-11-02T15:01:59Z

Doug Kass evokes Charles Dickens to show that the glass can be construed as completely full or completely empty. Even though I disagree with his analytical framework to some extent, Mr. Kass is always the most thoughtful of prognosticators.

How the Fed is Holding Back Recovery

2010-10-19T10:29:29Z

As usual, David Malpass is on target in his Wall Street Journal op-ed. The subtitle is "By promising to print more money, it's giving Congress an excuse to avoid critical tax and spending cuts." I would only add that the money printing also enables Congress and the administration to resist decelerating or reversing the rising regulatory burden which is also part of the problem. As he correctly points out, its big business and big government versus small business.

Trust in Government Is Now Completely Gone

2010-10-19T09:56:14Z

I was listening with only one ear when the hosts on CNBC's Squawk on the Street were talking about whether public pensions would be revised by extending retirement ages or other means. One of them commented something to the effect that trust in government would be reduced. I felt compelled to send the following comment via their website.

"Regarding your comments about declining trust in governments, public sector workers are probably the last bastion of trust in government. For the rest of us that trust started breaking down when we went cut the dollar’s anchor and went to floating exchange rates in 1971. Just look at how much purchasing power has been lost due to currency debasement over the last 40 years. This debasement is accelerating as the Federal Reserve issues even greater quantities of paper to cover previous paper debts.

"Severing the dollar’s link to gold removed the anchor or discipline on government spending which allowed it to mushroom far greater than anyone could have ever predicted. The absence of restraint is why the political elite continue to fight the gold standard with all they weapons they can muster.

"The gold standard is not a matter of issuing a quantity of dollars based on the quantity of gold in Fort Knox. The gold standard should be a matter of issuing a quantity of dollars based on the price of gold. As the price of gold rises above a predetermined level, dollars are withdrawn by the Fed. When gold falls below that level, dollars are injected. Thus, the price of gold becomes the “clearing price” for the supply and demand for liquidity in the world economy. Then the last bastion of central planning, monetary policy, becomes market driven."

Such a gold standard cannot be any worse than the monetary policy we have experienced over the last 15 years.

Mortgages Lost in the Cloud

2010-10-19T09:14:30Z

If you have been wondering about the significance of the foreclosure mess that the banks have gotten themselves into, the subtitle to this commentary in Business Week says it all:

"The foreclosure documentation mess isn't just a clerical problem. It erodes certainty about property rights—the key to capitalism."

I have been writing for some time about rising barriers to economic growth. Eroding property rights is one. Fluctuating currencies is another (see previous entry). Increasing regulations is a third. Increasing marginal tax rates is a fourth.

The slow growth economy is not a function of lack of government spending or monetary stimulus. It is a result of these rising barriers to production (again whether its a good or a service).

I overheard in passing someone refer to them as "inhibitors" to growth. Unfortunately, I didn't pay attention to the identity of the speaker so I could give the proper credit. However, I am going to adopt that expression for future reference. "Barriers" implies that everything comes to a halt; that is too strong. "Inhibitors" implies that growth is restrained or retarded and that is just what we will be seeing starting in the first quarter.

The fourth quarter will be stronger than anticipated as people advance their income from 2011 to 2010 to beat the marginal tax increases. I suspect we will see some "channel stuffing" that will bring higher revenue recognition, higher corporate earnings and shift personal income from the first quarter to the fourth quarter. Unfortunately, the first quarter will bring the hang over after the fourth quarter binge.

Currency Chaos: Where Do We Go From Here:

2010-10-19T08:57:25Z

Judy Shelton, long term advocate of sound money, interviews even longer term advocate of sound money, Nobel Laureate Robert Mundell. Mr. Mundell's conclusion: "'The most important initiative you could take to improve the world economy would be to stabilize the dollar-euro rate." (italics mine).

Just imagine what life would be like if each of the 50 states in the union could issue its own currency and those exchange rates were floating rather than fixed to some objective standard. Interstate commerce would be a lot lower than it is today.

How to Make Atlas - And Your Hip Surgeon - Shrug

2010-10-14T11:21:28Z

Rich Karlgaard and Greg Mankiw hit the nail on the head in talking about how the economy works ( I suggest that you read the Karlgaard posting and then click from there to the Mankiw op-ed in the NY Times).

The economy is all about people producing. You can divided economic players into three categories: (1) people who produce innovation and ideas; (2) people who add value to other people's innovation and ideas; or (3) people who supply capital to the first two. The government's role is to incent production by providing a level playing field, good infrastructure and sound money. Anything beyond that provides disincentives or actual barriers to production; the higher the barriers, the lower the production.

Unfortunately, the barriers to economic production have been rising steadily for the last ten years. As it stands now, there's nothing on the horizon that will change that direction. The politicians are merely arguing about the trajectory of the increase. Rising barriers discourage economic activity and causes capital to seek a more hospitable environment. It doesn't mean that there won't be economic growth, but it certainly will be lower than needed to pay off the debts that will eventually come due.

Having said that, I still think the GDP growth numbers (the mirror image of the National Income numbers) will surprise on the upside in the 4th quarter as rich people advance income into this year to avoid the higher tax rates that Dr. Mankiw details in his piece. As a consequence, next year's 1st quarter will be lower than expected because of the absence of that income.

Market vs Political Entrepreneurs

2010-10-05T13:22:31Z

In the past I have written about market entrepreneurs in contrast with political entrepreneurs. The market entrepreneur is the one who creates a product and/or invests the capital to bring it to market. The political entrepreneur is the one who seeks competitive advantage in Washington DC, a state capital or city hall.

A prime example of the latter is the use of eminent domain for economic development. William McGurn's Wall Street Journal column from last week "The Litigious Legacy of Kelo" spells out some of the ramifications of the use of eminent domain for private purposes.

What caught my eye today was a letter to the editor of the WSJ that gives a great description of what a political entrepreneur does. The proper term for the activity of a political entrepreneur is "rent seeking". To quote the letter writer, Roger H. Leemis, from Southfield, Mich:

"Kelo exemplifies the consequences of rent seeking, when private parties turn to the government for favors—benefits, subsidies, desired regulations, barriers to entry for competitors—to bypass a competitive market. This not only distorts the private sector, it corrupts the government. As George Bernard Shaw said: "A government that robs Peter to pay Paul can always depend on the support of Paul." Thus are government officials willing to support those who support them and act against the individual interests of the citizenry, including owners of property coveted by developers. Kelo is morally offensive because it allows Paul to take the roof from over Peter's head."

That paragraph explains why we have a monstrosity of a tax code and an out of control regulatory apparatus. It is due to "rent seeking". In the last 10-15 years Congress has started putting "sunset" provisions on the favors that they enact. I assume that the purpose of the sunset provision is to keep open the flow of campaign contributions so that the laws and/or regulations get renewed. A former associate of mine described that as members of Congress "annuitizing" their business.

Much has been said recently about the corporate tax rate. The U.S. corporate tax rate is 35% which is one of the highest in the world. However, the average tax rate paid by large corporations is far lower because of rent seeking in Washington. The statutory rate ought to be reduced and all the exceptions, loopholes and special provisions ought to be eliminated as well.

The Silver Lining

2010-10-04T13:17:13Z

Something good may yet come out of the recent/current economic distress. That something is a broad discussion of how the world really works; i.e. what creates jobs and a higher living standard for all.
Three articles in the press today discuss different facets of what creates a vibrant economy.

First, Robert Samuelson writes in the Washington Post (as seen on RealClearMarkets.com) about "Entrepreneurs: The Real Jobs Machine".

Next, John Tamny writes in Forbes how "Facebook Exposes Tax and Consumption Myths".

Finally, Don Luskin, writing in the Wall Street Journal, notes that we still face the prospect of repeating the grievous economic policy errors of the 1930's in his piece "The Trade and Tax Doomsday Clocks".

Principles for Economic Revival

2010-09-17T14:36:07Z

A "Who's Who" list of economists list the principles that they believe are necessary for economic revival. Several things are worth highlighting.

First, they state that economic policies need to be based on a long term strategy. Too much of what comes out of Washington is micro-management that encourages heavy lobbying and campaign contributions. Unfortunately we tax payers get to foot the bill. The tax code is especially pernicious and open to abuse as political entrepreneurs seek profits from crafting government policies rather than product innovations.

The second plank of their piece calls for a reduction in government spending. They should be very careful here. Bailouts, TARP's and pet pork projects should be eschewed. However, just as a recession is not the time to increase marginal tax rates, it is also not the time to cut government spending. If the other principles were to be adopted a growing economy would give us the luxury of addressing the very real spending problem (unless the ballot box takes care of that problem first).

The most important principle they put forth regards regulations. Expectations of a flood of new regulations are keeping small businesses paralyzed. Why would any entrepreneur commit capital now, when the rules of the game could change dramatically several times in the next 1-24 months? Small businesses lack a safety net; thus they cannot afford to take risk when the rules are about to change.

Finally, they address the need for a rules based monetary policy. A return to "honest money" is essential. While their proposal would be a step in the right direction it would still be monetary policy by central planners. Hopefully, some day, we will acknowledge 6,000 years of history and return to a gold based standard as put forth by the late Jude Wanniski. Incompetent monetary policy has been the main source of our economic problems for the last 40 years.

Really Good News . . . for the economy

2010-08-26T14:16:56Z

The second most closely watched economic statistic right now is the Labor Department's weekly report of the number of Initial Unemployment Claims as reported by the state unemployment agencies. (The monthly employment report is the most anticipated report). The number of initial unemployment claims is considered a "hard" almost "real time" statistic. However, there is a lot of "noise" in the data due to normal seasonal fluctuations during the year.

One of the major seasonal fluctuations is the annual shut down of the auto plants for retooling in July. As I understand it, GM did not shut down this year which distorted the seasonal adjustments. The auto workers typically file for unemployment during these shut downs. When they didn't file in July it made the numbers look better than expected because of the seasonal adjustments to the data series.

The seasonally adjusted data series has looked worse in August for the same reason. Brian Wesbury at First Trust Advisors compares the seasonally adjusted with the unadjusted data and shows that the actual number of new claims for unemployment is the lowest that it has been since September, 2008. If you look at his chart you will see why seasonal adjustment is necessary. However, there are times when the raw data needs to be examined as well. This is one of those times.

Why I'm Not Hiring

2010-08-09T12:25:13Z

Micheal Fleischer, president of Bogen Communications in New Jersey, spells out some of the barriers to hiring new employees. I have been making the case that the barriers to economic growth are increasing in the form of:

higher marginal tax rates (reduces after-tax return on capital investment),
increasing regulatory burden (increases cost of production and thus reduces after-tax return on capital investment), and
increasing trade restrictions (reduces the market's ability to price efficiently and thus reduces after-tax return on capital investment).

Is it any wonder that we are not getting the growth in hiring and investment we would like to see in this recovery?

Many supply side economists continue to highlight marginal tax rates as the problem when higher marginal tax rates are only a portion of the problem. Increasing regulatory burden and increasing trade restrictions don't get the press, but they are equally as important (if not more important).

Even with the passage of landmark legislation, it remains to be seen what the actual regulatory burden will be in financial services and health care (not to mention the impact on other industries). Despite thousands of pages of legislation, the regulatory agencies still need to write tens thousands of pages of regulations. Then, those regulations will need to be read and digested. All of this will take some time and will prolong this period of uncertainty and slow job recovery.

Having said that, the GDP numbers should look pretty good for the remainder of 2010. GDP or Gross Domestic Product measures the total value added in the national economy. By definition, its mirror image is National Income. With marginal tax rates set to increase on January 1st, those with the flexibility to advance income into 2010 and delay expenses into 2011 will do so in order to minimize the impact of higher tax rates. Those with that flexibility are also those with the most income so their shifts have significant impact on the National Income and Product accounts (GDP and National Income). We've seen this movie before; it happened in the first half of the 1990's, the last time marginal tax rates were increased. As I said, the remainder of 2010 should look better than it really is and the first part of 2011 should look weaker than it really is.

The Soak-the-Rich Catch 22

2010-08-03T22:47:35Z

Arthur Laffer shows in the Wall Street Journal that the top 1% of income earners pay more in taxes as a percentage of Gross Domestic Product than the bottom 95% of income earners. If tax rates go up, it is the top 1% that has the abilityl to hire the lawyers and accountants to make sure that their average tax rate stays the same even though their marginal rate has increased.

Marginal tax rates need to remain low so that capital will be employed to create jobs. Higher taxes on income and capital mean that fewer jobs will be created. Fewer capital projects will be profitable after tax and thus business investment will be lower than it would have been at the lower tax rates.

Higher tax rates in concert with a higher regulatory burden mean that the economy will not create as many jobs as it has in the recoveries of the last 30 years.

Without Stable Money There Can Be No Trust

2010-07-22T10:16:05Z

I have mentioned a number of times that the focus of government policy ought to be lowering the barriers for producers to produce. If the goal of government policy is increase employment then the government ought to do things that incent employers to grow their business. Unfortunately, government policy has had the (unintended?) consequence increasing the barriers to employment growth. (see the post of June 16th). Even a neutral policy would be welcome at this point.

Unfortunately, one major barrier to business growth has been the decimation of the value of the dollar. John Tamny lays this out beautifully in this Forbes.com opinion piece.

If we can't trust the currency, how can we trust any other government institution? Jude Wanniski wrote "A Gold Polaris" back in the 1990's. In it he attributed much of the social pathology that began in the 1970's after the Nixon administration broke the link between the dollar and gold.

Technical versus Fundamental Analysis

2010-06-29T10:36:06Z

There are two basic ways to look at the stock market. In evaluating a stock most people look at the attributes of the company, the industry or the county’s economy to determine whether the stock represents good value. They might ask, “is demand for the company’s products accelerating and will that acceleration lead to growth in earnings and dividends?”. This type of analysis is called “fundamental” analysis. Often you hear analysts on CNBC or Bloomberg speak of a company’s ”fundamentals”. The theory is that higher earnings and dividends will lead to higher stock prices over time.

The other type of analysis looks not at the supply and demand for the company’s products but at the supply and demand for the company’s stock. These analysts look at the historical price and trading volume to discern patterns of accumulation and distribution by the so called “smart” money (also known as “the herd”). This type of analysis is called “technical” analysis, a misnomer, but one that has been around for 75 or 100 years. There are traders who make money with a myriad of “indicators”, but sadly, most do not.

However, there is formation of stock/market index prices that has stood the test of time. It is called a “head and shoulders” formation for a reason that will become obvious. It comes about in the following manner.

The stock/index is in an uptrend. The price cycles up and down, but each high point in the cycle is higher than the previous high point. Each low point in the cycle is higher than the previous low point.
However, there comes a time when the pullback from the last high matches the previous low. What has formed at this point is a potential left shoulder and head in the head and shoulders formation.
If the subsequent rally fails to make a new high and pulls back to the previous two low points then we must respect the potential for a trend reversal.
If the price goes below the previous two low points (known as the neckline) then we have to assume that the price trend is down and the lows in the cycle will be lower and the highs in the cycle will be lower.
Ideally, volume will be highest under the left shoulder, a lower level under the head and even lower under the right shoulder.
The larger the distance between the “neckline” and the peak in the “head” the bigger the subsequent decline. As a rule of thumb, many say that the predicted decline from the neckline would be the same number of points as the distance between the peak and the neckline. Translation: a break below the neckline would indicate that we are only half way through the pain.

Currently, the major indices in the U.S. have traced out potential head and shoulders formations. See the chart of the S&P 500 shown below. A close below 1050 would put in play completion of a head and shoulders with a working target of 884.

The comparable numbers on the Dow Jones Industrial Average are 9,816 for the neckline and 8,428 as a working target.

One caveat: there are times when the market will make a slight break below the neckline and then rally to new highs. There are no sure things in this business. Someone has said that the market will do whatever it takes to make the maximum number of investors look foolish.

Prices below are daily through the close price on June 28, 2010.

China's Currency Move Draws Cheers

2010-06-22T13:27:58Z

Brian Wesbury and Bob Stein of First Trust Advisors analyze the ramifications of the change in China's currency/monetary policy. For them, the bottom line is that they will no longer outsource their monetary policy to the Federal Reserve. They now have the opportunity for a stable unit of account, unlike the United States.

It also means that China will buy fewer Treasury securities. Thus, the U.S. Treasury will probably have to offer higher interest rates to entice other buyers to purchase their bills, notes and bonds. The U.S. burned the Middle Eastern countries with a depreciating dollar back in the 1970's. We have not burned China with a depreciating dollar over the last ten years. It will be interesting to see who steps up to the plate as the buyer of last resort.

Bad Policy Explains Dow Stuck at 10,000

2010-06-21T10:28:10Z

In this piece John Tamny explains that the government's pursuit of poor economic policy has been bipartisan over the last 50 years

Disagreeing with Laffer

2010-06-16T10:19:29Z

Brian Wesbury and Bob Stein from First Trust Advisors respond to Art Laffer's WSJ op-ed piece from a couple of weeks ago. They point out why they think the economy will not collapse in 2011. As much as I respect Dr. Laffer, I agree with Wesbury and Stein.

The economy already has "issues" (see previous post) and the January 1st tax hikes will distort the economy even further as people take income this year rather than next year. So this year will look better than it would have and next year will look less robust than it would have, all other things being equal (which they never are).

Neither year will be as good as it could have been, but as long as the Fed maintains zero interest rates crumbs will trickle down from the government to provide some lift for the economy.

Small Businesses Are Suffering Major Shakedown

2010-06-16T10:03:16Z

Job creation has always come from entrepreneurs willing to commit capital to start or grow businesses. David Malpass gives chapter and verse as to why small businesses are not creating jobs in this recovery. It doesn't mean it won't happen at all, it just means that all the recently increased obstacles to doing business profitably will result in the commitment of less capital than would have otherwise been committed. Less capital commitment = fewer jobs created. Its that simple.

A Tale of Four Stock-Market Decades

2010-06-15T13:07:56Z

As usual, John Tamny is spot-on in his analysis regarding the need for a stable currency and the havoc that dollar instability causes. His comments about the dollar/gold relationship in the 1920's clear up a lot of questions for me. I recommend that you click on "Print" to get the printable version of this, print it out and read it regularly until fully digested.

Tax Hikes and the 2011 Economic Collapse

2010-06-07T07:50:19Z

Art Laffer once again writes that economic incentives do matter and that participants in the economy will do what is in their best self-interest. In this case they will advance income and production into 2010 leaving only the crumbs for 2011. Part of that shift will be conversions of traditional IRA's to Roth IRA's to beat future tax increases. So tax receipts will look far better in 2010 than they will in 2011 and in future years.

To take a page out of Dr. Laffer's analytical framework, the barriers to economic growth have already started to rise significantly as: (1) tax rates increase, (2) the regulatory maze gets worse, (3) Congress chips away at free trade, and (4) the Fed continues the debasement of the currency.

On the last point, take a look at the dollar versus gold, not the dollar versus the Euro. The latter comparison is just a "race to the bottom" to see which region can have the worst currency, the US or the Europeans. The strength of the dollar versus the Euro is just an indication that the value of the Euro is falling faster than the value of the dollar; but, the value of the dollar is still falling as indicated by the increase in the dollar price of gold.

Ironically, the last major bastion of relatively honest money turns out to be . . . China.

Cyclical Tailwinds vs. Secular Headwinds

2010-06-03T09:53:55Z

As I have said in the past, Doug Kass is one of the most thoughtful commentators in the crowd. In this piece he captures the tension we are seeing between the normal cyclical recovery in the economy and the known issues that will damage the sustainability of the recovery.

The New Protectionism

2010-03-29T11:35:18Z

This week's cover story in Business Week is "The New Protectionism". As documented by Jude Wanniski in his book The Way the World Works, protectionism in the form of the Smoot-Hawley Act was the cause of the stock market crash beginning in 1929 and ultimately the Great Depression in the 1930's.

This story documents the subtle and not so subtle barriers being raised by the Chinese government to foreign companies. On the other hand the federal government as well as individual state governments have been raising similar barriers. Should barriers on either or both sides continue rising it will be detrimental to U.S. and world economic growth and to the value of common stocks worldwide. The tipping point remains to be identified.

The 15 Money Rules Kids Should Learn

2010-03-29T10:14:14Z

Jeff Opdyke gives a sensible summary of The 15 Money Rules That Kids Should Learn. I would add a 16th that worked well for us. Have your children write down each expenditure . . . even if it is for a piece of gum. They will be amazed at how quickly money flows through their hands.

We were amazed at how conservative our children became when they were given a set amount of spending money for that had to last an entire vacation. It was a learning experience for both sides.

Cap and Trade for the Internet

2010-03-16T10:07:38Z

A couple of weeks ago Dan Henniger wrote a column entitled "Bring Back the Robber Barons". One of the points he made was a distinction between "market entrepreneurs" and "political entrepreneurs". Market entrepreneurs gain wealth by creating markets and businesses. Unfortunately, some get so large that they become political entrepreneurs. Political entrepreneurs attempt to create wealth by getting new regulations and tax code changes in Washington that disadvantage their competitors.

George Gilder shows a prime example of this phenomenon in his column "Cap and Trade for the Internet".

Debt-tastrophe - The Feds on Course to Doom

2010-02-18T22:47:55Z

The headline sounds like a piece written by a gold bug or a conspiracy theorist. But it's not. These are remarks made by Thomas Hoenig the president of the Federal Reserve Bank of Kansas City to a Budget Reform Policy Forum on Tuesday.

I don't remember a sitting federal reserve bank president being this outspoken. It is an indication of the depth of his concern about the looming crisis.

Why the Recovery Will Be Robust

2010-02-01T15:43:43Z

David Ranson, director of research at H. C. Wainwright & Co. Economics Inc, and an associate of John Tamny makes the case that the economic recovery will be robust. I agree with him initially, but believe that by the beginning of 2011 the growth rate will be retarded by the headwinds of changes in fiscal policy (higher tax rates), monetary policy (reversal of easy money), and trade policy (creeping protectionism).

The True Meaning of Inflation

2010-01-25T10:07:50Z

One of the biggest issues that this country faces is the economic ignorance of our political leaders . . . regardless of their party affiliation. John Tamny in this op-ed piece spells out what the political class does not understand - the true definition of inflation.

There has been much angst over the last few weeks about the nomination of Ben Bernanke as chairman of the Fed. While Mr. Bernanke might have found a way to clean up the mess he helped cause, news reports indicate that he does not seemed to have learned anything from the experience.

I nominate John Tamny for the position.

A little addendum to Mr. Tamny's piece:

The Fed's objective is to match the demand for liquidity in the economy with the supply of liquidity. If they achieve that we will have strong economic growth with no inflation.

Currently they try to guess the amount of demand for liquidity. Then they try to regulate the supply of liquidity by setting the price of liquidity via a target for fed funds rate.

If they are wrong then they end up starving the economy (the late 1990's) or fueling a bubble (housing in the 2000's).

Mr. Tamny, among others, would look to changes in the price of gold to determine whether the Fed is supplying to much liquidity (in the form of bank reserves) or too little. When the price of gold and other hard assets are trending up the Fed is too accomodative. When the price of gold is trending down the Fed is to restrictive.

One salient point that Mr. Tamny makes is worth repeating. When capital flows into gold or other hard assets, that capital is not being used productively in the economy.

I would add an extension to that point. When capital flows into hedge funds and proprietary trading by investment banks, it is not necessarily being used productively in the economy. Growth in hedge funds and proprietary trading signals that barriers to economic growth are too high*. By flowing to hedge funds et. al., capital seeks higher returns than the returns available in the "real" economy.

* The barriers to economic growth take the form of monetary policies (inflation/deflation), fiscal (tax) policies, trade policies (protectionism/free trade), and regulatory policies. The objective for the political class is to find a balance in all these areas that will promote employment of capital to provide jobs and economic growth. We approached that balance in the mid 1990's and the economy boomed. In the 2000's monetary policy was completely out of balance and we have paid the price.

Restoring Faith in Financial Markets

2010-01-19T09:49:19Z

John Bogle, retired founder of the Vanguard Funds hits the nail on the head in this op-ed piece that argues for restoration of the fiduciary standard as the centerpiece when judging corporate and investment managers.

The Fed and the Crisis: A Reply to Ben Bernanke

2010-01-12T10:17:43Z

Professor John Taylor coined the "Taylor Rule" as a prescription for the level of the federal funds (fed funds) rate. The interest rate on fed funds was the primary means used by the Federal Reserve (the Fed) to manage our (and the world's) monetary system. Professor Taylor has asserted that the fed funds rate was much too low for much of the last decade. Two weeks ago Chairman Bernanke responded to that criticism by stating that monetary policy was not the cause of the housing bubble. This article is Professor Taylor’s rebuttal.

The economy needs a certain amount of bank reserves to operate; just as a car's engine needs oil to lubricate it. The Fed's role has been to supply enough bank reserves so there is sufficient liquidity to get the economic engine to operate but not so much liquidity that the excess goes out the tailpipe and becomes inflation.

For the last 20+ years the Fed's Open Market Committee has tried to estimate the amount of liquidity demanded by the economy versus the amount already in supply. Then they set the fed funds rate at a level that will bring supply and demand into equilibrium. The problem is that it is impossible for a committee to have the information and the judgment necessary to correctly estimate the supply and demand curves for system liquidity, then correctly project the proper price of credit in the form of the fed funds interest rate and then to supply the proper amount of bank reserves to adjust the price of credit to hit the optimal equilibrium in the supply and demand curves. As a side note, when they could no longer drive the fed funds rate down (i.e. below zero) they changed to “quantitative easing” and began adding reserves to facilitate their purchases of mortgage backed bonds and other fixed income instruments. That’s how they have expanded the Fed’s balance sheet by over a trillion dollars.

As stated at the beginning, the Taylor Rule is a way for the Fed to govern the fed funds rate based on several factors such as economic output and inflation. Much of the blame for the housing bubble has been blamed on the low level of interest rates engineered by the Fed from 2003-2006. The Federal Open Market Committee apparently believed that the economy needed more and more liquidity and thus kept the fed funds rate very low. This caused them to supply more and more bank reserves to the system in order to keep the fed funds rate. Bankers, being bankers, felt compelled to loan against those reserves. The easiest loans were for real estate and for speculation by hedge funds. Had those reserves not been available, the loans would not have been made and the housing speculation and the commodity speculation would have been kept in check.

The Fed supplied the reserves but did not want the banks to loan against them. I guess the Fed is like the portrayal of banks in a current television commercial. A man gives a little girl a bicycle and when she starts to ride it outside of a small rectangle he tells her that the bike came with restrictions and one of them is to stay in that rectangle. The Fed kept the fed funds rate below the inflation rate, supplied the bank reserves necessary to keep the rate that low but expected banks to “stay within the rectangle”.

"20 Surprises in 2010" vs "The Old Normal"

2009-12-22T09:52:26Z

I recently posted an article that summarizes Bill Gross' (PIMCO) view of the economy and investment landscape for the foreseeable future. Its a future of sub par economic growth and sub par investment returns. Mr. Gross and his co-chief investment officer, Dr. El-Erian were very prescient several years ago in predicting a financial crisis. Two other viewpoints come from Doug Kass and Ken Fisher.

Mr. Kass is a hedge fund manager of the traditional sort and a top down strategist par excellance who can translate his strategy calls into good (absolute not relative) investment performance. Usually there is a disconnect between strategy and stock picks. He also warned of impending an financial crisis and then called the bottom of the stock market back in March. He turned much more cautious in late summer looking for what I would characterize an "intermediate correction" of 10-20%. The press has put heat on him since then but the stock market may have been building a top setting up the correction before heading down. It will be interesting to see what happens in the new year after any year end rally. As he points out in the linked piece about potential surprises for 2010, the last decade has taught us just how wrong the conventional wisdom can be.

Ken Fisher, on the other hand, is more on the exuberant side. Having called the market top in 2000 and the bottom in 2002-03 he missed the depths of the problems that unfolded in the last couple of years. In his defense (and mine), many of the problems were exacerbated by wacky accounting rules that rendered banks insolvent on a technical basis but not on an economic basis. When the Congress acted to remove some of the wackiness in March the market bottomed and has almost returned to the pre-Lehman levels of the stock market. Mr. Fisher argues from history that the harder the fall the bigger the bounce.

I would argue that we have had a bigger than "normal" bounce and that now we need to assess the environment for capital in general and stocks in particular. Bottom line, I think the economy will be better than the consensus forecast of 3-4% GDP growth in 2010 as incredibly low inventories are re-built and the recognition of income is advanced into 2010 (from 2011) to beat the 2011 tax increases (at the end of the day Gross Domestic Product = National Income; GDP describes how we achieved the national income, the National Income series describes where the income went). As a result, the 2010 federal deficit will be smaller than anticipated and the 2011 deficit larger than anticipated.

Large company profits will surprise on the upside because of the immense operating leverage created by the draconian cost reductions during the recession. Unemployment, on the other hand, will remain stubbornly high because small businesses will be (1) reluctant to hire and expand due to regulatory uncertainties; (2) unable to hire and expand due to lack of credit availability; or (3) both. For the stock market I look for a positive year in the 10-15% range, but somewhere along the line there will be a 10-20% correction (probably earlier rather than later).

Bill Gross: Curb Expectations

2009-12-09T12:32:57Z

I recently read the book When Markets Collide, Investment Strategies for the Age of Global Economic Change. Written as the current economic distress was getting underway, it was somewhat heavy but well worth reading. The author, Dr. Mohamed El-Erian, is co-chief investment officer of the fixed income mutual fund giant Pacific Investment Management Co, LLC, (a.k.a. PIMCO). One of the phrases coined regarding Dr. El-Erian’s thesis in the book is “the new normal”.

Last week I “attended” a virtual ETF conference which featured Bill Gross as the keynote speaker. One of the sponsors, Investment News, published an account of his presentation. Mr. Gross is the other co-CIO at PIMCO. In his presentation he updated what they project as the “new normal”. In summary, they are looking for slow economic growth, slow profit growth and investment returns of 5-6%. The three factors driving this environment are: (1) de-leveraging, (2) re-regulation, and (3) de-globalization. All of these will combine to reduce profit margins and slow profit growth, hence investment returns will be lower.

To the extent that the regulatory environment in general becomes tighter and nations of the world turn inward and adopt even mildly protectionist policies then he will be correct about investment returns. I sincerely hope that the de-leveraging continues and the use of debt is reduced to funding purchases of capital assets lasting multiple years.

I infer that his projection of 5-6% investment returns is for a balanced portfolio that might have had average returns of 9-11% over the 20 years leading up to 2007. The S&P 500 had a mean return of 13% over that period of time. In Bill Gross’ world the S&P 500 may have average returns of 7-9%.

Two counterpoints to his view: (1) The companies in the S&P 500 will grow by innovation and taking advantage of “capital friendly” policies in other countries. So even if he is correct about his economic growth projection of 1-2% per year I think profits of large, high quality companies will approach their historical rates. (2) Call me an incurable optimist, but I don’t expect that the U.S. will adopt as draconian a regulatory policy as he anticipates. In the presentation he said that he expects the government to control incentives, returns and compensation. Should that occur we will see a “brain drain” to other countries with more capital-friendly policies.

To a certain extent I think the template for this “movie” is the 1970’s and right now we moving into 1977.

Near Zero Rates Are Hurting the Economy

2009-12-04T14:19:24Z

Most of the criticism of the Federal Reserve's current monetary policy takes the form of "It may be helping in the near term, but in the long term its effects could be quite damaging."

In this piece from the Wall Street Journal, David Malpass presents a different view. Rather than helping the economy, the current policy is actually hindering recovery, the employment report this morning, notwithstanding.

Which Job Data Makes Sense?

2009-11-12T11:52:58Z

The employment report that came out last Friday seems to contradict itself. On the one hand, the number of jobs lost was listed at 190,000 jobs. On the other hand, the number of employed declined 589,000. Which number is correct? If I were an economist, I would say, "Both". However, I am not an economist so we will try to makesense out of the numbers.

The numbers come from two different sources. The 90,000 number comes from what is known as the "Establishment Data". The Bureau of Labor Statistics surveys businesses to find out whether they are hiring or firing. Obviously, a business has to have attained a significant size before it would even hope to be counted in the survey. The 589,000 number comes from the "Household Data". This data is gathered from a telephone survey of households.

The consensus has been that the establishment data provides the more reliable data since it comes from business. The thought has been that the household data is tainted by the attitudes of those surveyed.

However, the engine of job growth has always been small business, a group not well represented in the establishment data. So while medium to large businesses are laying off fewer workers than before, small businesses may still be very cautious. That caution is borne out by declines in Commercial & Industrial loan data.

Small businesses are not hiring and they are not borrowing. Is this caution voluntary or involuntary? Again, the conventional wisdom is that small businesses are not borrowing because the greedy bankers don't want to make loans with all the capital that the government supplied them. The bankers would rather keep that rather keep that capital invested at .10% per year (please note that should be read as one tenth of one percent per year on that capital; that is not greed). I think that the decline in bank loan volume is a factor of small business being unwilling to borrow more than it is a factor of their inability to borrow.

I suspect that small businesses are being cautious because of the potential changes coming from Washington. The potential for new taxes and new mandates are making decision makers very cautious. At this point it is impossible to estimate what the total cost of a new worker will be in the future. Why would an entrepreneur commit new capital to a business when the outlook for the return on that capital is quite uncertain. The uncertainty stems not from the normal economic cycle but from the behavior of politicians. The job situation will remain anemic until that uncertainty is resolved in a way that is not threatening to the return on (or return of) that capital.

In order to create a job someone has to commit capital in the form of office space/manufacturing plant and equipment for the employee to use. The governmnent has already borrowed a tremendous amount of capital for their operations so its not likely that the government will borrow more to set up offices and manufacturing plants.

The government has also tried borrowing capital to stimulate entrepreneurs to commit their own capital. So far entrepreneurs seem unwilling to take the bait. Having seen what's happened to the banking industry they may be unwilling to get involved with the government.

Desperately Seeking the Bruce Bartlett of Old

2009-10-27T22:20:16Z

John Tamny writes an excellent analysis of Bruce Bartlett's shift away from classical economics in contrast with his 1981 book, Reagonomics, that did so much to bolster the case for an incentive driven economy.

What stands out to me is Mr. Tamny's succinct description of supply side or classical economics:

"Major media have reduced supply-side/classical theory to tax cuts paying for themselves, but the main point of the original classical thinkers was that demand is an afterthought because our demands are unlimited, so the trick to stimulating economic activity is to remove the barriers to production. Production is itself demand, so if taxes are low, money sound, regulation light and trade free, individuals will produce with strong demand being the certain result."

We're All Balloon Boys Now

2009-10-24T11:11:23Z

Through the marvel of real time communication I was able to watch the "balloon boy" flying over Colorado in real time over the Internet and so was able to see that when it landed the balloon was empty despite the alleged hysteria of the parents. Thus, Daniel Henninger's column title caught my eye. The column can be summed up neatly by his quotation of Lily Tomlin, "I try to be cynical, but its hard to keep up."

Washington's Plans May Result in Even Higher Executive Pay

2009-10-24T10:05:52Z

Studying the "Law of Unintended Consequences" has become more than a cottage industry. With the dramatic increase of laws and regulations coming out of Washington over the last 80 years there is enough to keep an army of consultants busy.

Yale law professor Jonathan Macey writes about the unintended consequences of the previous efforts to cap executive pay and how those regulations are partly responsible for the mess today. He goes on to conclude that whatever Washington does now will have even further unintended consequences.

What Happens if the Dollar Crashes

2009-10-19T13:20:32Z

One of the lead stories in this week's issue of Business Week is entitled "What Happens if the Dollar Crashes". Many economists think that the dollar should be weaker. However, the costs of a weaker dollar would be onerous as this article discusses.

If only a portion of the capital/liquidity in the banks today were loaned out, there is no way the "real" economy could absorb that much money. It would only result in higher prices starting with gold and commodities such as copper and oil. By the way, gold, copper, oil and other commodities are on the ascent.

In the last cycle the excess dollar creation didn't show up in the Consumer Price Index (CPI) until very late in the game. Where it did show up was in the price of the aforementioned commodities and in housing prices. This time around the housing market will not inflate abnormally as an excess supply will hold prices in check. If more of the excess dollars sitting on bank balance sheets find their way into the economy we will begin to see non-housing components of the CPI begin to inflate within the next year.

Just to give you an sense of the issue, banks currently have 10 times more reserves than they had just before Lehman went under. Stated another way, there are enough bank reserves to fund an economy ten times the size of the economy that existed in the summer of 2008. The real economy will not grow ten times its current size any time soon. On the other hand, the price level just might. The ball is in the Fed's court.

Deficits and the Chinese Challenge

2009-10-13T13:18:06Z

Zachary Karabell calls on history to illustrate how a transition from U.S. economic dominance to Chinese economic dominance could take place. The one issue he doesn't address is the potential for economic shipwreck in China due to demographics. China may be in the same situation as Japan has been for the last 15 years with the same potential consequences.

The Demise of the Dollar

2009-10-06T09:57:12Z

For two years on this blog I have run articles and columns about the need for a stable value for the dollar. My preference would be a link to gold because I believe that the price of gold acts as the clearing price for the supply and demand of liquidity needs in the economy. When the supply and demand for liquidity in the economy are in equilibrium then the price of gold is relatively stable.

The Federal Reserve Open Market Committee is the last bastion of economic central planning. They attempt to guess the liquidity needs of the economy. Then they set the fed funds interest rate at a level that will address the supply and demand for liquidity. They were successful in the mid 1990's as the price gold centered around $375.

However, starting in 1997 they began to starve the economy for liquidity as evidenced by a decline in the price of gold from $375 to just above $250. That eventually led to oil prices under $15, a 45% decline in the stock market and a recession.

In 2002 they began to re-liquefy the economy and as a result the price of gold moved back over $300. Had they acknowledged that the economy then had enough liquidity and managed the monetary base to a $350 gold price we would have never had the real estate bubble that ensued because banks would not have had the funds to loan. We all know what happened as a result. There were other factors in play that caused the real estate bubble, but monetary error enabled the other factors to participate. Thus, central planning of monetary policy by a central planning committee targeting an interest rate has been a failure.

Back to my original premise, the price of gold is the best indicator of the supply and demand for liquidity in the economy. If the Fed supplies too much liquidity then the price of gold rises. If the Fed restricts liquidity then the price of gold falls. Obviously there are other factors at work such as political risk, but that is simply distrust of politicians at work which is why people own gold in the first place. Keep in mind that all the gold ever mined is still in existence so supply and demand for gold have a minor impact on the price. The gyrations of gold over the last 40 years show that the price of gold reflects the monetary policy successes and failures by the Federal Reserve.

Interestingly enough in the current crisis, the price of gold had “stabilized” in the $850-1,000 price range as the economy began to revive. That stability indicated to me that the Fed’s Open Market Committee was actually walking the tightrope despite the fact that their aim as well as their policy tool are not projected at the correct target. Recently, we saw gold moving over $1,000 at the same time we begin receiving economic reports that the economy is not reviving as quickly as the optimists (including me) had estimated. Gold above $1,000 would suggest that the Fed ought to drain some reserves from the banking system because the economy is not ramping as quickly as thought and thus it is not “using” all the liquidity at its disposal. That excess liquidity is what fuels bubbles and eventually the CPI.

However, we learn today that the price of gold might be reacting to one of those “other factors”. A story in the UK Independent entitled "The Demise of the Dollar" discusses a proposal by the Arab states in concert with China, Russia and France to move away from the dollar as the reserve currency over the next nine years and use . . . gold as the interim world monetary standard. More distressing is that the federal government appears to regard this as a side issue. If the government fails to address this issue directly, then we are building the base for the next financial crisis.

This Corporate Business Model Makes Me Cry

2009-10-02T10:01:56Z

Several weeks ago I linked to "Congress' Business Model Makes Me Cry". Today's link from Kimberly Strassel, columnist for the Wall Street Journal shows how some companies compete more effectively in the lobbies of Congress than they do in the offices of customers.

Nix the Dollar

2009-09-28T19:18:52Z

I missed this piece by John Tamny when it appeared on the Forbes website. It is a clear, concise explanation of the role of money in an economy and why a stable value of the currency is essential.

How Hedge Funds Got It Right on Risk

2009-09-25T14:30:49Z

I am not familiar with David Ignatius who is an op-ed columnist for the Washington Post. Given my bias against their biases, I don't read that newspaper. However, he makes a very valid point in this piece.

The unregulated hedge fund industry seems to have fared much better than the regulated banks in the recent financial panic. I'm not sure I would buy the statistics completely without investigating since there could be survivor bias in the numbers, but I may have to quit using the hedge fund industry as my favorite whipping post in this crisis.

The Fed's Job Is Only Half Over

2009-09-25T14:25:29Z

Fed governor, Kevin Warsh, addresses the issue of unwinding the massive amount of liquidity that has been injected into the system. He notes, "Judgments made by policy makers in the current period are likely to be as consequential as any made in the depths of the panic."

Taxes, Depression and Our Current Troubles

2009-09-22T16:44:23Z

Art Laffer expresses the hope that the Fed and the administration learn from the mistakes made during the Great Depression. However, he notes that the lessons they should learn are quite different from the ones they have articulated. He goes on to catalog the policy errors that caused the depression and exacerbated it.

An Interview with Doug Kass

2009-09-21T16:30:02Z

Because he is a money manager rather than a professional "talking head", Doug Kass is the most thoughtful of the commentators whose work is in the public domain on a regular basis. This interview is well worth reading.

Regulation and Its Unintended Consequences

2009-09-18T11:26:18Z

The opening sentences of this piece set the stage:

"Most bankers deserve the backlash they are experiencing right now. The absurd mistakes and sheer stupidity we have seen in the financial markets in the last decade are not what we were supposed to expect from the Masters of the Universe. And the cost of the bailouts gives a whole new meaning to the concept of 'bank robber'.

"But bankers are not the only ones we should look at in a new light. Another casualty of the crisis should be belief in the powers and virtues of government regulators, because their fingerprints are all over the crime scene as well."

Still a "V"

2009-09-15T15:20:52Z

Every recovery there is the battle of "shapes" for the recovery. Some say it is it is a "U", some say an "L" and others say it is a square root.

Economist Brian Wesbury is still forecasting a "V" shaped recovery. In this video (6-7 minutes long) he details why he thinks it is happening as we speak.

While I think he is an excellent economic forecaster, at the end of the video he drifts off into stock market prognostication. That, you can take with a grain of salt.

Main Street Banks May Crush the Recovery

2009-09-01T11:28:35Z

Peter Morici, a regular guest on The Kudlow Report, reports on the commercial real estate losses that are looming for regional banks. These losses may be so large that they will seriously hamper the regional banks' ability to lend to small and medium sized businesses. Reducing the credit available to these companies would seriously endanger the economic recovery now underway because they are the engines that drive employment growth.

The Mistakes We Make--and Why We Make Them

2009-08-24T10:07:19Z

The hottest area of finance research is Behavioral Finance. Don't let the name scare you off. This article from the Wall Street Journal gives realistic ideas for individual investors to cope with the manic-depressive nature of investing.

Congress' Business Model Makes Me Cry

2009-08-10T13:23:25Z

I am not familiar with the author of this piece, but I share his pain. As a political science major in college, I had the "opportunity" to extensively study the legislative process. Things have only deteriorated in the last 35 years.

There is one thing that Mr. Frezza does not mention as part of the Congressional business model. About 10-15 years ago they began putting "sunset" provisions into the laws. If the petitioner wants to "renew" the the legislation after the sunset period it requires another series of campaign contributions and payments to lobbyists. One of my co-workers at the time observed that Congress had "annuitized their business;" i.e. they would be generating a recurring stream of payments. I, too, cry for my country.

Why Investors Should Ignore GDP

2009-07-31T13:16:41Z

Most people are unaware of the arcane workings of how the Gross Domestic Product is calculated. John Tamny delves into the numbers and shows why it is not a particularly enlightening statistic for investors.

Suspend Mark-to-Market--Now

2009-07-28T20:23:26Z

As usual, Brian Wesbury and Bob Stein are right on the money. The stock market has rallied on the supposition that mark-to-market accounting had been put out to pasture. Now it turns out that the accountants are looking to expand the use of it. The only hope is that the regulators would have the good sense to disallow its use for bank regulatory capital. If M-T-M accounting is reimposed on bank regulatory capital then forecasts of 600 on the S&P 500 might be reasonable.

Las Vegas as a Lesson in Basic Economics

2009-07-17T10:29:59Z

John Tamny uses the development of Las Vegas as a paradigm of how an economy should work. As much as I abhor legalized gambling and casinos, it does make a good illustration.

Tamny is a little over the top by referring to "Bugsy" Siegel as a "visionary" and an "intrepid entrepreneur". However, I will admit that in many cases, casino operators made a smart business move by transferring operations from a locale where they were illegal to one where they had been legalized and then making the new location a desirable destination (another city built on the foundation of air conditioning).

New Evidence on the Foreclosure Crisis

2009-07-06T13:05:52Z

Picking up where the last entry left off, Stan Liebowitz, a professor of economics at the University of Texas, Dallas has studied the data on mortgages and come to the conclusion that the driving force in foreclosures is not those who were "tricked" into taking mortgages they couldn't afford. Instead the issue is taking mortages with no down payments and thus zero equity - regardless of whether the loan was "subprime" or prime.

Again, not knowing the cause of the problem will lead to incorrect solutions that have their own set of unintended consequences.

A Government Failure, Not a Market Failure

2009-07-06T13:01:00Z

The alleged "free market" gets blamed for much that is wrong in the world. Unfortunately, the "free market" does not exist in the United States. There are only degrees of regulated markets. Periodic changes to the regulations and the tax code enable our representatives to generate recurring campaign contributions. So, there is a vested interest in maintaining a myriad of regulations and a Byzantine tax code (with apologies to the Byzantines).

If we don't know the cause of the problem, we won't be able to arrive at the correct solution. The incorrect solutions will then generate more unintended consequences.

As John Makin points out in this piece from Commentary, there were three government policy failures to the financial crisis: (1) the expansion of homeownership to all regardless of financial capability; (2) the incestuous relationship between the ratings agencies and the issuers of the debt that became known as "toxic assets"; and (3) the Federal Reserve's implicit guarantee that they would bail us out of any "bubble".

I would add another failure by the Fed - the pursuit of an ill conceived monetary policy that created too much liquidity that the banks felt compelled to lend in order to maintain their profitability ratios and retain their banking charters.

Dear Critics: The recovery is coming, really

2009-06-16T09:41:17Z

I still think that Brian Wesbury and Bob Stein have the best handle on the economic picture.

Despite job losses last year, the economy was muddling along until the financial panic hit and financial institutions refused to trade with one another over fear that the other party in a trade was technically insolvent on a regulatory basis due to mark to market accounting. When that issue dissipated in March, so did the financial panic.

How Traders Killed Value Investing

2009-06-11T12:00:20Z

According to this article proprietary trading or program trading is now 30% of the volume on the New York Stock Exchange. However, while it is a serious issue for investors, I think it is a more serious issue for the economy.

Capital that could be employed to provide goods and services (read jobs) is employed for computerized and other types of short term trading. We can reasonably assume that the return on capital from trading has been and is projected to be higher than investing that capital in the economy to produce goods and services (and jobs).

The question is: is the return on capital from trading that high; or, is the return on capital in the real economy that low?

While government likes to think it can create jobs, no job is created until someone puts capital to work.* If we want to be a nation that creates goods and services then the return on capital from the real economy needs to be more attractive. Competitive forces from other countries do put a lid on profitability, but the business climate also limits returns. By business climate I mean: (1) tax policy (high corporate tax rates with a Byzantine maze of loopholes**), (2) monetary policy (a dollar that fluctuates wildly in value), (3) regulatory policy (government directing how business will be done, above and beyond safety issues), and (4) trade policy (moves to restrict trade, such as the Smoot-Hawley Act that caused the Great Depression).

Conclusion: jobs won't be created in volume until the climate becomes more friendly for capital because there are just too many alternative ways to earn a return on capital.

* We know what happens when government puts massive amounts of capital to work and centrally plans an economy: we call it the USSR.

** My apologies to the Byzantines for likening them to the U.S. tax code. I shouldn't defame them that way.

"Don't Mess With Texas"

2009-06-11T10:28:12Z

"A Daring Trade Has Wall Street Seething
Texas Brokerage Firm Outwits Big Banks in a Mortgage-Related Deal, and Now It's War"

Its always fun to see Texans get the better of Wall Street Actually, its fun to see anyone get the better of Wall Street.

Get Ready for Inflation adn Higher Interest Rates

2009-06-10T16:47:19Z

Arthur Laffer was one of a handful of economist who correctly predicted the economic chaos that would result when President Nixon closed the gold window in 1971. We were in uncharted waters then, much as we are now. Thus, we have to take seriously his warnings that inflation and higher interest rates are on the way.

Growth Does Not Cause Inflation

2009-06-08T11:23:49Z

The view that economic growth causes inflation has done much damage to our economy over the last 12 years. As John Tamny notes, this is the prevailing view at the Fed, as it was when Alan Greenspan was chairman.

I believe that the economic success of the Clinton presidency was based on three factors: (1) Pursuit of free trade policies via NAFTA; (2) Reduction in the capital gains tax rate to encourage risk taking; and, (3) the relative stability of the dollar for the first 4-5 years of his presidency.

In the late 1990's the Fed engineered a mild bout of deflation over concerns that the unemployment rate was too low. That policy caused a couple of financial panics and the bear market of 2000-2003. To avoid repeating that mistake they pursued an inflationary policy beginning in 2004 that was a primary cause of the housing boom.

The Fed's mandate needs to be changed. It should focus strictly on the stability of the dollar and forget about finetuning the economy.

The Myths About a Return to the Gold Standard

2009-05-13T11:16:23Z

This is a piece I wish that I had written. Those who profit from floating currencies have done an excellent job of framing the debate regarding the need for a stable value of the dollar. Hence, there are many myths about the gold standard. Fortunately, John Tamny does an excellent job exposing them.

Putting the Toothpaste Back into the Tube

2009-04-20T12:04:40Z

Andy Kessler addresses one of the primary issues the Fed will have to address once the economy starts to recover. As noted below, I disagree with him on what should be done because his prescription does not change what got us into the mess in the first place: the Fed's inability to prescribe the proper interest rate that will allow the supply of money to intersect the demand for money while maintaining a stable dollar in terms of purchasing power.

As a former semiconductor analyst and hedge fund manager Andy brings a lot of experience to his informative and entertaining books. My favorites are Wall Street Meat based on his experiences as an analyst and venture capitalist in the dot com boom along with How We Got Here, A Slightly Irreverent History of Technology and Markets.

My comment posted to his commentary:

"The Fed may be able to estimate the supply of money (and even that is highly questionable) but they cannot estimate the demand for money as the last twelve years show. Andy correctly addresses the velocity issue as the key issue. We risked deflation in the late 1990’s. The deflationary trend exposed the excesses of that economy and caused the recession of the early part of this decade. Then the Fed went overboard in 2003-2006 and created an inflationary boom concentrated in the housing industry. Inflation was just beginning to show up in the CPI when the economy hit a brick wall due to the liquidity issues caused by the failure of the banking industry.

As the most monetary of all commodities (all that ever existed is still in existence somewhere), the real economic function of the gold standard is to use the price of gold as a clearing price between the supply of money and the demand for money (the number of gold bars in the vault is irrelevant). What the Fed needs to do is manage the price of gold. If the price begins to increase above a certain targeted level the Fed should drain reserves from the system until the price settles back to the target. If the price decreases as it did in the late 1990’s, they should add reserves to the system until the price increases back to the target. Thus, the “supply” of money is allowed to expand and contract as dictated by demand for money and the need to maintain its purchasing power. The price of gold is the canary in the coal mine.

I believe the stable value of the dollar was one of the three keys to the success of the economy under the Clinton administration (free trade and the capital gains tax rate cut were the other two). The price of gold was reasonably stable in the $300-400 range from 1989 to 1997. Beginning with the economic recovery of the early 1990’s, inflation was significantly reduced as a factor in corporate and personal planning. Thus, PE’s were justified in reaching the highs attained the last time we were on a gold standard

While some may scoff at using a commodity price rule, it certainly can’t do any worse than the Greenspan/Bernanke standard has done over the last 12 years. What it would do is add a degree of predictability and certainty to monetary policy. For more information see Jude Wanniksi’s paper “A Gold Polaris”."

Have We Seen the Last of the Bear Raids?

2009-03-30T21:03:20Z

Andy Kessler's op-ed piece in last week's Wall Street Journal works through some of the mechanics of how the short selling hedge funds were able to speed the financial system into a financial panic.

One factor he doesn't mention is the termination of the up-tick rule for short selling that took place in July, 2007. Also, lack of enforcement of rules against naked short selling (selling short before the stock is actually borrowed) has enabled the hedge funds to engage in bear raids.

The Bonus Tax Is Just Plain Stupid

2009-03-23T12:14:03Z

The AIG bonuses are obviously a very emotional issue right not. However, I agree with Jonathan Clements that "the bonus tax is just plain stupid". For those who are not familiar with him, Mr. Clements was a well regarded personal-finance columnist for the Wall Street Journal. He regularly championed the average person and fought against high cost financial products.

Due to the "mark to hedge fund fire sale price" accounting (a.k.a mark to market accounting) we have been in a financial panic that has caused capital to go on strike. Banks that are cash flow positive and otherwise producing net income have seen their capital decimated from writing down assets for which no market exists. Despite being cash flow positive, they are in danger of technical insolvency. Who wants to do a transaction with an institution that may be declared insolvent tomorrow? Without our largest financial intermediaries to facilitate transactions, the economy has gone into a tail spin as the financial panic has morphed into a recession.

Now the House of Representative has leaped before looking. I suspect that in hindsight, when all the facts are on the table, we will find these payments were a legitimate piece of the compensation pie. The public lynching of the AIG executives will have unintended consequences as noted by Mr. Clements.

The talented producers and their financial institution employers now have no incentive to cooperate with a government that changes the rules after an agreement has been reached. In addition to a capital strike we will be faced with a brain drain from the financial institutions. One might argue that these "brains" got us into this mess. However, I would argue that the financial institutions will not be able to attract the talent they need if they have to live with a salary cap of $250,000. Can you imagine George Steinbrenner having to live with a salary cap of $250,000 per year for the New York Yankee players? Can you imagine the Eagles on a performance tour if the band members were limited to an income of $250,000 per year?

I would also argue that the financial panic would have been contained to a blip on the radar as were the panics of 1997 and 1998 if new accounting standards had not gone into effect in the fall of 2007. I suspect that most people would find it difficult to recall the causes and effects of the 1997 and 1998 events.

Buffett's Unmentionable Bank Solution

2009-03-13T12:32:59Z

It appears that a consensus is developing around suspending mark to market accounting for bank capital purposes. Warren Buffett mentioned it on CNBC on Monday. Holman Jenkins writes about that interview in his column this week.

There would still be disclosure of the marks to market for financial reporting, but banks would not be declared insolvent by the regulators because hedge funds sold so-called "toxic" assets at fire sale prices.

Based on yesterday's hearings, Congress seems to be on board with such a solution. Hopefully the SEC and the Financial Accounting Standards Board will get on board as well.

When adopted, this solution should go a long way to solving the financial panic which, in turn, will allow the recession to end in months, not years.

Forget Stimulus, Its the Bank Bill that Matters

2009-02-10T12:25:18Z

Brian Wesbury and Bob Stein make the case that what matters to the economy and the markets is how the Obama administration handles the banking situation. They show that there is no correlation between government spending and gains in the number of jobs. If that were the case then the period from 2002 to 2007 would have seen tremendous job gains based on the tremendous increase in federal government spending.

They also point out that the U.S. remained mired in the Great Depression until the Roosevelt administration suspended mark to market accounting in 1937. "Then, from 1939 to 2007, the U.S. had a relatively subdued business cycle and experienced no panics or depressions, even in the 1980s and 1990s when more than 3,000 banks and Savings and Loans failed." When mark to market accounting made its comeback in 2007 the banks (and by extension, the economy) immediately ran into trouble.

Its Okay to Double Dip

2009-01-16T12:17:52Z

As noted in this article by the Fisher Investments Editorial Staff, markets don't turn on a dime - unless its the oil futures market that ran up on hedge fund buying and collapsed on hedge fund liquidation.

If you look at the S&P 500 back in 2002-2003 as the previous bear market was ending, the bottoming process took 9 months. The S&P 500 first hit bottom in July, 2002, as we saw early signs that liquidity was returning to the market. It rallied and then hit a slightly lower low in October, 2002. It rallied again and made the final bottom in March, 2003. Conversely, the "topping" process in the market also consumed most of 2007. Markets the size of the U.S. markets do not turn on a dime.

The current bottoming process will continue as signs increase that liquidity is returning to the economic system. This crisis has been a true "financial panic" (as they were called in the 19th century). To combat the panic the Federal Reserve has injected massive amounts of money into the banks. Normally, those injections would turn the stock market. The difference this time is that the money or liquidity is being hoarded by the banks and not finding its way into the markets. The bottoming process will be complete once we see indications that the liquidity is flowing through to the markets.

Why didn't the oil market gyrations threaten the viability of the players (and the economy as a whole) as did the collapse of the collateralized debt obligation (CDO) market? Futures markets generally involve even more leverage than the hedge funds assumed to purchase the CDO's. The key differences are:

The oil futures contracts are standardized;
They trade on an exchange with transparency;
They are marketed to an identifiable market discovered price every day.
At the close of each day, the participants whose losses increased for the day have to add equity to their account.

Thus, the "counter party risk" that we have experienced with the banks is virtually non-existent in the futures markets. Thus, the decline in the price of oil and gasoline has been a welcome relief to the public rather than a threat to the economic viability of the nation.

2009 Outlook: Markets Measure, They Don't Forecast

2008-12-16T09:53:19Z

Cumberland Advisors, an investment counsel firm has issued their 2009 Outlook as written by David Kotok, Chairman and Chief Investment Officer. While I agree with the forecast, the real point of the piece is the statement that "markets measure, they don't forecast" with the application to the current environment.

Prediction is Very Difficult, Especially If It's About the Future (Niels Bohr)

2008-12-04T10:28:38Z

I listened to a conference call yesterday with David Giroux, CFA, manager of the T. Rowe Price Capital Appreciation Fund (PRWCX). He had some interesting observations that I think are worth repeating:

"Most predictions about the future are based simply on extrapolations of current trends. The current wisdom of crowds is more often wrong than right:

New era for technology (1999-2000)
Housing prices do not go down on a national basis (2006)
Private equity new dominant force in global equity markets (2006-2007)
China will decouple from a weak US (2007-early 2008)
Oil and commodity prices can only go up (2007-early 2008)"

He went on to say, "The market is pricing in continued fundamental weakness for the foreseeable future, despite unprecedented monetary and government intervention. When the fundamentals turn, the rally across all asset classes will be significant and quick given sentiment, valuations, and current market expectations."

Having experienced a few more cycles than Mr. Giroux, I would note that the technology, real estate and energy booms are all recycled from the 1970's and 1980's. You can throw into the mix the "one decision stock" mania of the late 1960's and early 1970's. All of these are discussed in my contribution to the recently published Investing in an Uncertain Economy For Dummies.

Mr. Giroux also supplied the quote in the title of this post from Nobel Laureate (Physics) Niels Bohr

How Do We Start Growing Again?

2008-12-01T16:41:01Z

Economists have long been the butt of many of my jokes. However, there are a few economists that I do respect. I think highly of Arthur Laffer, David Malpass, and Robert Mundell among others. I would add to that list John Tamny who is a senior economist for H.C. Wainright Economics and the editor of the Real Clear Markets website.

The essence of this article can be summed up in one quote, "Economic growth is always and everywhere the result of productive work effort, so rather than more economy-enervating handouts, the policies necessary to get our economy moving again must be focused on the removal of barriers to productivity."

Bring Back the Link Between Gold and the Dollar

2008-11-24T10:50:30Z

In an op-ed piece in the Financial Times Richard Duncan connects the dots between the floating dollar (fiat money) and the current crisis as well as the economic crises over the last 47 years.

A gold backed dollar, structured properly, puts restraints on government and business alike. That is why it was removed in the first place. That removal led to the first quadrupling of the price of oil in 1973-74. Its been chaos ever since.

Big Earth, Little Us

2008-11-11T11:11:09Z

The late Jude Wanniski was the midwife to supply side economics. He was also truly a Renaissance Man in capability and thought. His widow, Patricia Koyce Wanniski, is making the body of his writings available at www.polyconomics.com. From time to time I will highlight some of my favorites from almost 30 years of reading him.

"Big Earth, Little Us" puts the energy issue in perspective. This Memo on the Margin was written in May, 2005, but it reprises a Memo he wrote back in 2000. In it there are two points that stand out.

First, from 1857 to 2000, 78% of the holes drilled for oil have occurred in the oil patch of the United States. The reason is that the U.S. is the only country where citizens who own the surface rights to property also own the mineral rights. The world has not been explored for oil.

Second, all the oil produced in the U.S. from 1857 to 2000 would not fill 25% of Lake Tahoe. I still marvel at that statistic. Check out what Jude wrote.

Weak Dollar, Weak Presidencies

2008-11-04T17:49:50Z

John Tamny, editor of Real Clear Markets and senior economist at H.C. Wainright, looks at the successes and failures of various presidencies through the prism of the dollar. As the title states, a weak dollar translates into a weak presidency and a stable, strong dollar into a successful presidency.

The End of Prosperity

2008-11-04T17:43:44Z

Readers of this blog should be aware that I view Dr. Arthur Laffer as one of the greatest economists of our time. I’m sure that Robert Mundell is in that category; I just wish I could understand his writings. Laffer’s great strength is the ability to translate economics into everyday language. That must be a necessary skill for spending a lot of time in Washington.

Arthur Laffer, Stephen Moore and Peter Tanous have authored a book entitled The End of Prosperity, How Higher Taxes Will Doom the Economy If We Let It Happen that came out in October. Fortunately the book is written for the general population and is easy to follow and understand.

The thesis of the book is stated in the title. The authors identify what they call “four killers of prosperity”: trade protectionism, tax increases and profligate government spending, new regulations and increased government intervention in the economy, and monetary policy mistakes. The book traces the economic history of the 20^th century up until this summer showing how these four prosperity killers have acted on the economy in the past and how they are set to do it again. The authors also describe the Laffer Curve and show why it is what I call a basic truism. They go on to discuss the economic expansions of the past that resulted from the Mellon, Kennedy and Reagan tax rate reductions.

I strongly urge everyone to obtain a copy and read it, particularly if your knowledge of “supply side economics” comes from the press. While you may yawn at the prospect of reading a book on the economy, it failed to put me to sleep. There were several nights that I read it well past “lights out”.

Just How Uncertain Are the Times?

2008-10-21T09:49:16Z

As you may be aware from this website, I am a member of the Garrett Planning Network. The GPN is network of independent, fee-only financial planners.

Over the the summer, a number of Garrett planners collaborated on writing a book entitled Investing in an Uncertain Economy for Dummies. The by-line on the book shows Sheryl Garrett, the progenitor of the network, as the author. In actuality, she is the editor, and members of the network authored the chapters in the book (my chapter is on "Growth versus Value" investing and deals with stock market manias as well).

Sheryl is doing a radio blitz today as publicity for the book. One of the programs is called "Mancow". I have heard of the show but don't think we get it in our market so I tuned in over the Internet for a half hour.

In addition to having Sheryl on the show (briefly), an ongoing theme of today's show was the possible end of the world. We just thought times were uncertain and the stock market is bad. Mancow had a man purportedly calling from a secret government bunker in Virginia Beach. The unidentified man called to warn that the earth is on a near-collision course with a new unnamed planet. As I understood it from the brief time that I listened, the near passage of planet X will disrupt the tectonic plates, reverse the polarity of the North and South Poles and create complete havoc with the earth's climate. All of this is supposed to happen in the next three years. Here, all along I thought the stock market was discounting the financial crisis. Now I find out its discounting the end of the world. (Anticipation of the end of the world has always been a good time to buy . . . see previous two posts).

I felt much better when another caller stated that the North and South poles switch polarity every 500,000 years or so and that it's no big deal, so not to worry.

Anyway, it does reduce the concern over global warming.

Buy It Like Buffet

2008-10-21T09:29:17Z

Doug Kass weighs in on Warren Buffet's bullish call last Friday on stocks. Doug is more cautious on the long term, but agrees that there are stocks out there that are have very attractive valuations.

Buy American, I Am

2008-10-17T11:01:05Z

In the New York Times today, Warren Buffett urges us to buy American stocks.

I agree with his recommendation. As I said last week, this is a good time to re-balance your portfolio which means that the average investor will be buying stocks.

There are three things going on here:

1. The financial panic caused by the failure of Lehman, Fannie Mae, Freddie Mae and American International Group. With the TARP and the capital injections into the banks this should be behind us.

2. The recession resulting from the financial panic. The things that the government has put in place to combat the financial panic will also be effective in countering the recession. These moves have come much earlier in the recession than they normally do. Usually the government has to figure out that we are in recession (which has not yet been declared) and then they have to decide what to do. This time around the government initiatives to fight the financial panic should keep the recession from being severe.

3. The liquidation of the hedge funds. Highly leveraged hedge funds are being liquidated. The assets they own declined in value. The banks that lent them the money to buy the assets are seizing the collateral to cover the loans. As soon as they seize the collateral the assets are sold. That is why we get the sudden down-drafts in the markets (stocks and commodities in particular). Yesterday, no one showed up at the market with a portfolio to liquidate so the market rallied in the last hour.

Its hard to say when the liquidation of the hedge funds will be over, but once it ends the selling pressure will end and the todays stock and corporate bond prices will look very attractive in hindsight.

Its Good to Review History

2008-10-11T07:48:06Z

Times of crisis are always a good time to review history to ensure that our assumptions are correct.

John Steele Gordon's "A Short Banking History of the United States" is a good review of the history of central banking (a.k.a the Federal Reserve) in the U.S.

The Financial Times also carried "A Lesson from 1929 for the Hedge Funds" that discusses the issues that led to the regulation of mutual funds . . . and why some regulation is in the offing for the hedgies. (You may need to register for the Financial Times, but its free and a good thing to have.)

Potential Change in the Pecking Order

2008-10-08T11:36:06Z

As you might imagine, I have been watching a lot of CNBC and Bloomberg TV over the last few weeks. Listening to the talking heads has done nothing to dissuade me from a long held view.

For years I have noted that stock market forecasters had a terrible forecasting record. In fact, I often said that the only group with a worse record is the weather forecasting profession. I always believed that stock market forecasters could always fall back on weather forecasting as a safety net.

This morning I turned on the radio to get the weather forecast during my 5 minute commute, only to hear the local meteorologist (who happens to be one of the few good ones) give a stock market forecast.

Sensing weakness in the group above them, the weather forecasters must be mounting an attack to move up the food chain and supplant the stock market forecasters who are just above them.

I have to warn the meteorologists, in the future, stock market forecasting won't pay like it did previously, now that the brokerage firms have become banks.

On a positive note, if the stock market forecasters are at the bottom of the food chain, the quality of the forecasts might improve if the practitioners are aware that they are performing without a safety net.

Actually, the stock market gurus still have the economists to kick around. Did you know that lawyers now tell economist jokes?

The Tail Might Be Wagging the Dog

2008-10-08T10:38:52Z

One of the things that has been bothering me lately is the source of demand for stocks when the bottom comes.

When the market bottoms a large part of the buying comes from short sellers who are buying back the stocks they shorted into the decline. A normal or long transaction involves the purchase of a stock and then the sale of it later. A short sale involves the sale first (using borrowed stock) and then the purchase later to replace the borrowed stock.

When the market bottoms and starts up then the shorts have to run for cover and their purchases are a large source of the demand that fuels the dramatic increase off the bottom. The problem is that often times financial stocks lead off the bottom. Once the market is convinced that the survivors will truly survive, then the rally starts. Unfortunately the ban on shorting the 1000 or so financial stocks means there won't be as much demand off the bottom.

Doug Kass addresses this issue in his latest post on TheStreet.com. The point is that the professionals will find a way to be short the market; they have done so in the S&P 500 futures pit and their covering will fuel the rally off the bottom . . . whenever it comes.

On the Other Hand . . .

2008-10-06T12:05:52Z

Doug Kass has been very good on the financial environment since I became aware of him a year or so ago. At the risk of putting words in his mouth, I think that he might agree things are in place for a bottom, however, he argues that we are facing the "winter of our investment discontent".

Back in the "olden" days the short sellers in the hedge fund community always had the best information about companies. I think it was because they had the most at risk. When you are short a stock, your risk is not a 100% loss, it is open ended.

In recent years the ranks of hedge fund managers exploded because the pay is potentially much better than traditional investment management. I think it was Doug Kass (who belongs in the old style group) who coined the expression that the majority of current hedge funds today were engaged in the business of "turning normal returns into abnormal returns". As everyone is aware now, they did this by borrowing inordinate sums versus their assets. Unfortunately, we have a front row seat on the unwinding of all this debt (de-leveraging).

We've Seen the Bottom of the Abyss

2008-10-06T11:42:53Z

Anthony Bolton argues that things are in place for a bottom in the markets. As the bio at the end of the article states, Mr. Bolton is President, Investment at Fidelity International after managing the Fidelity Special Situation Fund for 27 years.

October should be a good month to rebalance your investments to bring weightings in line with the targets based on your risk tolerance.

Loose Money and the Roots of the Crisis

2008-10-01T17:33:36Z

Judy Shelton hits a home run with this op-ed piece. The root cause of the crisis is the lack of honest money.

Ms. Shelton writes, "In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions -- More regulation! Less complex financial instruments! -- let's not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange -- the measure, the standard, the store of value -- which defines the very substance of the economic contract between buyer and seller. It is the basic element, the atom of financial matter.

It is the money that is broken."

I recently had a conversation with one of the individuals who participates in the process of setting monetary policy. My comment to him was that the mechanism they use to set monetary policy does not work very well. Now, the mechanism they use for monetary policy is to set the interest rate for federal funds [ a.k.a. fed funds, the rate at which banks loan each other money to meet reserve requirements; the Federal Reserve then injects or removes bank reserves from the banking system to keep that interest rate on their target.] His comment back was to the effect that the process works very well. His point was that they process of targeting rates worked well, but maybe they targeted the wrong rate and injected too many reserves in the last few years.

The Federal Reserve (Fed) kept the target rate too low coming out of the 2001 recession. The low rate caused them to add too many reserves to the banking system. Reserves in the banking system are a hindrance to the bank unless loans are made based on those reserves. So, unsurprisingly, loans were made based on those reserves ($5 of loans per $1 of reserves). Since the banking system probably didn’t “need” these reserves in the first place, they made loans they wouldn’t have otherwise made . . . to subprime mortgage borrowers. The other side of the coin is that Congress was urging the banks to make loans to those who had previously been unable to qualify for a mortgage. When the Fed provided the reserves the banks made the subprime loans.

Then Wall Street took those subprime mortgages, pooled them and packaged them into securities that pension plans, hedge funds and other investors could buy. The hedge funds borrowed up to 95-96 cents on the dollar to buy some of these bonds. When housing prices peaked and started going down then borrowers with no equity in their homes stopped paying and even defaulted on the mortgages. Let’s say, for instance that 20% of the borrowers in one of these pools are not paying the mortgage payment or they are headed to foreclosure. Then one could conclude that the bond is only worth 80-90 cents on the dollar (figure a 50% recovery on foreclosure).

The hedge fund that owns the bond on borrowed funds is now “upside down”. It owes more than the bond is worth. Unfortunately, there was no standardization of those securities so they are not “fungible”. Fungible means they are essentially standardized and thus interchangeable. Bottom line, if the hedge fund goes to sell the mortgage backed bond, it has to be negotiated on an individual issue basis. Think of it like real estate. There is no standardized real estate. Each deal is location by location. The same is true of these bonds, although standardization has long been possible for mortgage backed bonds via Ginnie Mae, Fannie Mae and Freddie Mac. However, the issuers of these bonds did not choose to do that.

Back to the story, the hedge fund tries to sell their upside down bond. The bids it receives are 15-20 cents on the dollar; call that fire “sale value”. Due to the lack of standardization, potential buyers do not know what they are buying, thus they make very low bids. The economic value of the bond could be 70-80 cents on the dollar because 80% of the borrowers are making their payment, but some are questionable. Here is the real issue: the market price of the bond is assumed to be 15-20 cents on the dollar. Banks and others have to mark the value of their holdings down to the market price of 15-20 cents on the dollar and take an 80-85 percent haircut on the value of their holdings when they report their financial statements Then they have to reduce their capital by the amount they reduced the value of these bonds. Keep in mind that banks have to maintain certain levels of capital or the FDIC puts them out of business.

If the capital is wiped out because of marking these bonds to this market price then the bank is technically insolvent but not economically insolvent. However, no one is going to do business with them because they are technically insolvent (even if they are economically viable). The FDIC will still shut them down and others who transact with them could lose the value of the transaction. Hence, the credit crisis.

You might ask, why doesn’t the bank just value them at their "economic value" rather than the fire sale value? Accounting rules contain a principal that the value of assets must be set at their current market value . . . even if there is no market value. That is probably oversimplistic and a bit unfair, but I think the thrust of it is true. So the bank values their holding at the so called market price.

There is one other intervening variable called Sarbanes-Oxley. The CEO and the CFO have to certify the veracity of the corporate financial statements. Making a mistake on the statements opens these executives to criminal action. Its easy to see why they are very conservative in valuing these assets. Corporate bankruptcy beats personal jail time just about every time.

Getting back to Ms. Shelton, she makes the point that it would be better to use a market based price to signal when to add or subtract bank reserves rather than have a central planning committee try to arrive at the correct answer.

The most monetary of all commodities is gold. For over 5,000 years gold has been money. In 1971 the U.S. government tried to declare that gold is not money. Since then “value” of the dollar has declined precipitously from .0286 ounces of gold to .0011 ounces of gold, a 96% reduction in the value of the dollar as measured by the price of an ounce of gold. That's the main reason that the price of oil has gone from $2.50 in 1971 to its current price. The sellers of oil want to maintain their purchasing power.

The good thing about gold is that all of it that has ever been produced is still in existence. Also, current production makes a very small dent in the existing supply. The same cannot be said about other commodities. That’s one reason that gold has always been regarded as money (and still is).

Most people mistakenly believe that for the U.S. to be on a gold standard requires that there be enough gold in Fort Knox to back every dollar bill that is in circulation. Nothing could be further from the truth. When Alexander Hamilton put this country on the gold standard I don’t think there was any gold in the vault. Quite simply the way a gold standard would operate today is for the Federal Reserve to watch the gold price. When it gets below a target level they would add bank reserves to the system until the price of gold came back to the target. When the price of gold rose above the target they would subtract reserves from the banking system.

Supply and demand for dollar liquidity would “clear” in the price of gold which signals when the system has too much or too little in the way of dollar liquidity. Under the current system the Federal Reserve is great at managing the supply of dollar liquidity but has never been able to get their arms around the demand side of the equation. Hence, the credit crisis.

The Paulson Plan Will Make Money for Taxpayers

2008-09-25T10:35:56Z

Andy Kessler (former Wall Street analyst and hedge fund manager) argues that by purchasing these assets the government could make over a $1 trillion profit. I lean toward Andy's view that, done properly, the government could turn a profit, much as Berkshire Hathaway will make a profit out of this crisis.

The key may be that the new administration either needs to keep Hank Paulson or bring in Robert Rubin to administer the process and not turn it over to the bureaucrats.

On the other hand, Dan Dicker, in a video from TheStreet.com, makes the case that the toxic paper should be benchmarked and traded in the commodities exchanges because they are the most transparent, most efficient mechanisms for price discovery. The devil would be in the details of how the inidividual assets are identified and benchmarked.

Here's a Plan to Avoid a New RTC

2008-09-23T16:38:48Z

Brian Wesbury discusses his proposal to solve the financial crisis without a $700 billion blank check being given to the Treasury Dept.

I have been talking about the issues of "mark to market" accounting for almost a year. Wesbury gives a good analogy of why it is so injurious. He likens it to a homeowner who gets a "margin call" because a neighbor's home was foreclosed and sold at a price well below what was perceived as market value.

If the Treasury does get the authority to spend the $700 billion, I suspect they would not even have to spend all of it. If they would buy some of the "toxic bonds" based on their current cash flow (or even a small discount to that level) then new market values would be established and the owners of this paper could write up the value of their holdings to reflect the new market value. Oh, and their earnings would recover as well. If this sounds absurd, blame on the accounting rules.

However, at this point, I think bad policy would be better than no policy to address the freeze up in the financial markets. Not to sound like an alarmist, but I could easily see the financial system grinding to a halt if something isn't done quickly.

Waves of Punitive Destruction

2008-09-16T19:51:43Z

Brian Wesbury has been right all along about the economy. While others have kept repeating that we are in recession, he has rightly kept his eye on the data.

I presume that the title of the article is a play on the phrase "creative destruction" which was used by Joseph Schumpeter to describe a vibrant expanding economy . . . horse and buggy falling prey to the automobile; word processors giving way to personal computers; et al.

While Wesbury is right on the economic impact of the crisis, I do believe that we have come to the point where one of two things happens: either the financial system collapses (punitive destruction) or the crisis gets resolved and we live happily ever after.

A large part of the selling we have seen in asset backed obligations, commodities and stocks is the unwinding of positions held by overly leveraged hedge funds that can't meet their margin calls. The risk is that this massive dumping of assets brings down an entity like AIG. The collapse of AIG would could take the financial system to the brink of collapse as financial transactions grind to a halt.

The Phillips Curve Is Dead, Except at the Fed

2008-09-16T19:23:01Z

The Phillips Curve originally related wage increase pressures to the unemployment rate. It has been extended to relate the level of economic activity to the inflation rate. The thesis is that rapid economic growth causes inflation and a declining economy is dis-inflationary or even deflationary.

While this may seem like common sense, in this article John Tamny shows why the opposite is true. Unfortunately, the prevailing world view at the Federal Reserve is based on the Phillips Curve. Thus, the Fed's actions are not only counterproductive, they can be downright dangerous for the economy.

"Hedgies Get Their Comeuppance"

2008-09-08T11:00:24Z

One of the keys to the stock market is to watch where banks are making an inordinate amount of loans. The sector(s) getting the lion’s share of the loans is (are) the sector(s) that will lead the next debacle. Obviously residential real estate has been such a sector in this cycle. The other sector has been hedge funds using margin (loans against portfolio holdings) to take “abnormal risk to produce normal returns” as Doug Kass puts it in his column on TheStreet.com. (The two sectors intertwine when the hedge funds borrowed money to buy bad mortgages).

Kass also notes in the article written Friday, September 5^th, “Today, as equities and commodities slide, the risk managers have taken over from the portfolio managers. And those risk managers are selling posthaste regardless of a sense of value, the relationship of stocks to interest rates, etc. . . .” The issue for the hedge fund debacle is how soon this liquidation by the risk managers will run its course.

The other issue, addressed by Jim Cramer, is the residential real estate debacle and the government takeover of Fannie Mae and Freddie Mac. Every lending induced bear market needs a spectacular bankruptcy to mark the bottom. While not technically a bankruptcy, the Fannie and Freddie takeover may qualify for that role in this cycle.

Fear and Loathing in the Markets

2008-09-04T09:26:39Z

I am not familiar with the author of this piece, but I do think that what he says makes a lot of sense. If there is any one piece of the puzzle that pundits and forecasters miss, it is the self correcting nature of the markets . . . which is why I named this blog "Regression to the Mean"

In a similar vein, I am amazed that the dividend yield on General Electric is actually higher than the the yield to maturity on the 30 year U.S. Treasury bond. Even if GE's dividend only grows the 6% that Value Line is forecasting (versus 12% over the last 10 years) that implies a 10%+ estimated total return. Compared to Treasury bond yields there are a number of blue chip stocks like GE that are very cheap when compared to their historical values.

Its an Election Year; Is Your Will Updated?

2008-08-27T11:02:27Z

This is not a political statement; rather it is a checklist of things that needs to be done periodically that "will help you stay on top of important issues for yourself and your family -- much like changing the batteries in your smoke detectors every time we go on or off daylight-saving time." The author suggests reviewing these every four years between the party conventions and the election.

A Mighty Gust from Texas

2008-08-27T10:51:13Z

I was reading an aritcle in U.S. News & World Report this morning when I saw a statement that grabbed my attention. It said "U.S. wind production jumped 45 percent last year, and, in July, the country overtook Germany as the world's top wind producer".

I had no idea. Based on the size of the Congressional Record there is no doubt that Washington D.C. has long been the world's top wind producer.

Seriously, the article discusses oilman T.Boone Pickens' campaign for alternative energy sources in concert with accelrated drilling for petroleum. Electricity generation from wind plays an important role in his plan. Unfortunately, I could not find the article on their website to provide a link.

Inflation Is a Clear and Present Danger

2008-08-19T12:36:33Z

Brian Wesbury argues that inflation is not a matter of price indices but a function of excess dollars in the financial system. I agree with him with him on the problem but think we need to look to a "price rule" to govern monetary policy rather than a Milton Friedman style "quantity rule".

I do have to say that Arthur Laffer's lack of concern about inflation does give me pause. I don't know whether he views the gold signal as having lost its relevance or he views the long term fiscal policy outlook as so negative that the inflation problem pales in comparison. Dr. Laffer, Stephen Moore and Peter Tanous have authored a book entitled "The End of Prosperity: How Higher Taxes Will Doom the Economy--If We Let It Happen" that is due out in October.

As I have noted before, it was Dr. Laffer's conversations with Jude Wanniski that launched the supply side revolution. When President Nixon suspended convertibility of the dollar into gold most economists predicted that gold would fall to $5 from $40. We know that the opposite happened. As I understand the story, Wanniski went in search of an economist who had predicted the correct outcome. That lead him to Arthur Laffer and Robert Mundell. For the full story read Wanniski's book The Way the World Works.

What to Make of Oil's Weakness

2008-08-14T13:19:56Z

John Tamny correctly links the price of oil to strength and weakness in the dollar. Of course the best measure of the dollar's value is to look at the price of gold. Read the article

Is the U.S. Household Savings Rate Dangerously Low?

2008-07-23T11:25:00Z

For years I have argued that the Personal Savings Rate as reported by the government distorts the reality of U.S. savings. In this report David Malpass shows how and why that is true. He also documents that personal savings in the U.S. has been very strong over the long term.

The Fed to Latin America: Slow Down

2008-07-16T14:12:08Z

Ms. O'Grady is spot on when she says, "For decades Latin America has been plagued by currency devaluations, inflation and lackluster growth. But just as some key countries have gotten serious about price stability and begun to reap the benefits through higher growth, the region is facing a new economic menace: the Federal Reserve." Read the rest.

Never Has a Free-Trade Deal Been More Vital

2008-07-08T11:38:55Z

George Mitchell, former Senate Majority Leader for the Democratic Party, argues in the London Times that "Seven years after the Doha Declaration, talks continue at the World Trade Organisation (WTO) in Geneva. The need for a successful conclusion has never been more urgent . . ."

He mentions that the Smoot-Hawley Act turned the stock market crash in October, 1929, into the Great Depression of the 1930's. I would point you to Jude Wanniski's book, The Way the World Works. He documents how the crash took place as the Smoot-Hawley Act neared passage. When it didn't pass, the market rebounded in the spring of 1930. Then in June, 1930, in a surprise move, the bill passed and the bottom fell out of the market. The stock market was anticipating the depression that would ensue as a result of the Smoot-Hawley bill.

None of the government policies of the 1930's put in place by the Hoover and Roosevelt administrations would have any affect on the depression because they did not address the cause: the big decline in trade put in place by the law. What brought us out of the depression was World War II and the free trade policies begun in its aftermath.

Mean Street: Five Lessons for Financial Panics

2008-07-01T13:57:46Z

The title of this column says it all.

Are Bean Counters to Blame?

2008-07-01T13:33:47Z

An issue that I have noted in the past is the requirement that assets prices be "marked to market"; i.e. assets have to be valued at the current market price on the balance sheet, even if they are held for investment rather than trading purposes. The resulting change in shareholder's equity has to flow through the income statement as a gain or loss.

The real problem comes when there is no market. No on is willing to bid for the asset to establish a market price. The asset has to be marked down aggressively to reflect that absence . . . even though the asset is still paying interest.

This article in the New York Times discusses the issue. It does not talk about the reason why chief financial officers and chief executive officers have to be so aggresive in writing down assets. I believe that the reason is Sarbanes-Oxley which threatens criminal penalties for inaccurate financial statements. If I had the possibility of jail time I guess I would be aggressively conservative as well.

Obviously there is more to this financial panic than phantom losses, but I believe it has been exacerbated by the accounting rules as well as SarbOx.

The Coming Population Bust

2008-06-19T03:21:05Z

I am not familiar with Jeff Jacoby, a columnist for the Boston Globe, but he has written a very provocative opinion piece discussing The Coming Population Bust.

Economic growth is a function of workers added plus equipment/facilities for them to work with or on. If we don't have growth in both workers and capital equipment we will have serious economic dislocations down the road.

Unless Something Changes Dramatically, We Will Continue to See Dramatic Swings in the Price of Oil

2008-06-12T08:58:23Z

While I try to avoid being political on this blog, the linked editorial from the Wall Street Journal has some important points about the energy issue. As it clearly notes, “energy ‘independence’ is an impossible dream”, however, it goes on to say “there’s no doubt the U.S. has vast undeveloped fossil-fuel deposits”. Then it gives chapter and verse.

The key to understanding economics is that producers have to produce before someone can consume. As barriers to production increase and even become insurmountable there will be less to consume.

At a long term price range of $50-75 per barrel of oil equivalent there is plenty of reserves that are economic to develop, if the production companies have the confidence that the price of oil will remain at or above that range. Looking at the average monthly price of West Texas Intermediate crude oil, twice in the last 25 years we have seen the price of oil plunge by around 70%, once in the 1980’s and once in the 1990’s. For good measure there was a 44% decline from November, 2000 to December, 2001.

The price volatility is the result of poor monetary policy and incoherent energy policy. From exploration to full production can take 5-15 years and cost billions to tens of billions of dollars. During that time the companies are exposed to the vagaries of U.S. monetary and energy policies. The oil company managers who pulled out the stops in the early 1980’s to increase the supply of oil soon became ex-managers when the price fell as low as $10 per barrel from $40. The managers of the 1990’s and 2000’s did not care to bet their careers on the sustainability or stability of higher oil prices. If the price plunges 70% again we are looking at $40-45 oil. If I were an oil manager thinking about spending tens of billions of dollars on oil exploration and development, I certainly wouldn’t bet my career that “this time its different” no matter what the talking heads say.

Until we recognize that fossil fuel is not going away in this century and learn to live with that fact in an environmentally sensible way, we will continue to have wide swings in the price of oil. Layer on top of that the instability of the dollar and we will continue to have dramatic swings in the price of oil.

The Weak Dollar Threat to World Order

2008-06-12T07:49:07Z

We Americans (particularly those of us in the midwest) have been insulated from dealing with currency translation issues on a day to day basis. Thus we are unaware of the impact that a fluctuating currency has on businesses and consumers that have to incorporate it into their day to day decision making. Judy Shelton does an excellent job of explaining the weak dollar policy's ramifications on the U.S. and the rest of the world.

As I have said before, one of the main reasons the price of oil rose to $138 is the weakness of the dollar versus other currencies. Many have experienced rising prices over the last couple of years. We are now starting to see the impact of the weak dollar show up in the CPI making inflation "official".

Oil Has Reached a Turning Point

2008-05-28T07:38:39Z

Daniel Yergin, author of ‘The Prize: the Epic Quest for Oil, Money and Power’, and chairman of Cambridge Energy Research Associates, discusses "the rest of the story" regarding oil prices: the supply response and what constrains it. Read the story.

As I have repeated ad nauseum, the falling dollar is not an unrelated variable in the commodity price rise of the last few years, it is the independent variable to gold and oil as dependent variables in the pricing equation.

Had the Fed and the Treasury pursued a stable dollar policy the price of oil would still be up, but it would be much, much lower.

You Can't Soak the Rich

2008-05-27T06:21:28Z

Back in January I linked to an op-ed piece by Arthur Laffer entitled "The Tax Threat of Prosperity" showing that it is the top 1% of tax payers who are the "swing factor" in federal tax receipts. When tax rates are high they take expensive steps to avoid paying taxes When rates are low they just pay the tax without bothering to spend money to avoid the taxes (keep in mind the distinction between tax avoidance and tax evasion). The effect is that the effective tax rate on the top 1% of tax payers does not vary much.

David Ranson, head of research at H.C. Wainwright & Co. last week wrote an op-ed entitled "You Can't Soak the Rich" reviewing what he calls "Hauser's Law" which states "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." Tax revenue on the other hand is directly proportional to Gross Domestic Product.

If income tax rates increase there will be a dampening effect on entrepreneurial activity as well as investment by large corporations. Higher tax rates will lower the growth rate of GDP and thereby lower the amount of tax revenue because the "tax revenue yield" will remain about the same percentage of a lower than anticipated GDP.

Oil's Perfect Storm May Blow Over

2008-05-23T06:24:20Z

The Telegraph out of London has published a story that the forces of supply and demand may finally catch up with the oil price. Read the story.

Personally, I believe that there is a great deal of hedge fund speculation in the oil futures market (keep in mind that the “hedgies” are the same group that brought you the subprime mess). The price move from $125 to $135 per barrel looks more like a "short" squeeze than a demand driven price move. For every buyer there is a seller. Sellers in the futures market don't necessarily own what they are selling for future delivery. They have committed to deliver the commodity in the future for a certain price on the assumption that the price would fall. Then they can purchase the commodity at a lower price to deliver to the buyer who paid the higher price. They get to pocket the difference between what they sold it at and what they paid for it.

However, sometimes the price moves against them and they have to buy back at higher prices and cover their “short” position. It looks like we are in the “short covering” phase now. So the perceived demand for oil may just be traders scrambling to purchase what they had already sold at lower prices.

The commodity futures markets exist to allow producers and users of a commodity to set prices for future delivery and consumption. However, producers (such as farmers of wheat) and users (food companies) don’t always want to buy and sell at the same time. So there are “speculators” who participate in the market. They provide needed liquidity for the participants who really need to buy and sell the commodity. Normally “speculator” carries a negative connotation, but in this situation speculators fulfill an important role in the smooth functioning of a commodities market so that producers and users have an orderly market for purchase and delivery at future dates.

A commodity market gets into trouble when a lot of “newbies” come in to trade the commodity. That is what has happened over the last few years in the oil market. The new entrants don’t have the history and the “feel” of the commodity. What they do have are computer models. There is nothing more dangerous to our economic health than a hedge fund with a computer model.

There are probably a lot of new traders coming into the agricultural markets as well, but prices there seem to be tied more closely to supply and demand. Of course, that supply and demand is distorted by government policies, but I shan’t go there.

In both oil and agricultural products the role of the depreciating dollar cannot be underestimated. Because these are international commodities, the U.S. is going to pay more in dollar terms as the Fed continues to devalue the dollar.

Barry Zito and the Bum CEO

2008-05-17T19:09:50Z

I've gotten so far away from baseball that I had no idea who Barry Zito is or why he would be the subject of a financial column.

Reading the column brought back a conversation that I had with another financial planner last year. We were talking about the potential for caps on CEO pay and I said that it was okay with me if they would put the same caps on entertainers and professional athletes. Apparently, I hit a nerve with the other planner because at one point in his life he had been an aspiring professional athlete. (Of course, given my level of ignorance he could have been Most Valuable Player).

Anyway, this column from Fisher Investments' MarketMinder website speaks to the subject of compensation for baseball players and CEO's and the vagaries of signing both of them to big contracts in anticipation of continued good performance.

At least baseball players don't have to deal with a credit crunch, inflation and a suspect economy.

How to Use the Strategic Petroleum Reserve

2008-05-09T12:20:57Z

Op-ed piece in the Wall Street Journal today suggests using the Strategic Petroleum Reserve as counter-balance to the market power of OPEC. Having the Department of Energy sell when prices are high and buy when they are low could take the edge off the fluctuations in the oil price (novel concept: buy low and sell high).

The long term cure for highly volatile oil prices is to have a monetary policy that promotes sound money. The price of oil did not fluctuate wildly when the supply and demand for dollars was governed by the market. The boom/bust cycles in oil began when President Nixon shifted the responsibility for the supply of dollars to a committee of government workers. By nature, they are incapable of determining demand; the market is far to vast to be understood by a small group of people, let alone governed by them. Thus they cannot properly assess the needed supply to clear the market with a stable unit of account.

As long as we import the majority of our oil requirement the price of oil, at the margin, will rise when there are too many dollars in the system and it will fall when there are too few. Only the millions of market participants can provide the information necessary to maintain a stable dollar. It is unfortunate that those at the controls don't listen to that information flow.

Blackrock's Swoop May Signal Turning Point

2008-05-07T08:42:27Z

The British newspaper, The Daily Telegraph, highlights something that I have been thinking (see March 19^th post). Holders of sub-prime mortgage backed bonds and other collatoralized debt obligations have been very aggressive in writing down the value of those assets. On the other side of this financial panic we may see earnings rebound strongly as these assets continue making their interest payments, trading resumes and these bonds are written back up to par value.

Public companies are required to "mark to market" their financial holdings; that is, they have to value the assets on their balance sheet at the current market price. The difference in the current value versus the previous value has to flow through their earnings statement. So if the value of the bonds drops, then they have a negative impact on their earnings. What happens if there is no market for these bonds because they are not trading? Then they have to be creative and assign a value. In a Sarbanes-Oxley world I think it is a good assumption that the value assigned will be overly pessimistic and assign a very low value. Top managements have to “guarantee” the accuracy of their financial statements. To make sure they take it seriously they face criminal liability if they are wrong. They believe it is much better to err by being too pessimistic than too optimistic. In that situation executives will choose a lower stock price and economic disruption over accuracy every time. Even the remote possibility of jail will get their attention.

Cut, Cut, Float the Funds Rate

2008-04-29T18:19:01Z

Wayne Jett argues the case that the Fed is using the wrong lever (controlling the Fed Funds rate) to try to control inflation, the economy, and the value of the dollar. The market ought to set level of interest rates all along the yield curve. The Fed should concentrate on maintaining a constant value of the dollar. As he notes, the price of gold is the best barometer of the supply and demand for dollar liquidity. Read the article

I agree that the Fed should float the Fed Funds rate. The failure of central planning for interest rates should be obvious to everyone. Once the market absorbs that new information the Fed should begin selling long term Treasury bonds to reduce the number of dollars in circulation. Once the dollar price of gold reaches some predetermined value they should conduct open market operations to maintain that price. The dollar would once again be "as good as gold". An added benefit would be a positively sloped yield curve which would allow the banks to regain their health.

Free Markets Are Rare in Starving Nations

2008-04-24T06:13:31Z

This article is a good follow-up on yesterday's piece by Wayne Jett. Long term poverty and hunger are caused by the political and economic structure of a country, not by actions of the developed democracies. Read the article.

Those countries with the highest poverty and hunger rates are those that have the highest restrictions on economic freedom. These restrictions include punitive tax rates and few property rights, both of which go hand in hand with the absence of a rule of law. In essence, people are not allowed to produce, so they don't. If they try to produce it is confiscated by corrupt regimes.

Economic Freedom Advances Human Rights

2008-04-23T09:19:01Z

Wayne Jett does an excellent job of showing why the degree of human rights in a country is a function of economic freedom in that country. The United States could still do a great deal to relieve poverty within its own borders by reducing the drag of high barriers to economic growth embodied by:

A currency that experiences wide swings in value; and
Tax rates that discourage advances in the standard of living.

Read the article

Laffer Curve Video Part III

2008-04-15T12:35:14Z

The February 26th blog entry linked to the first two parts in a video series concerning the Laffer Curve. This link will take you to the third and final video in the series produced by the Center for Freedom and Prosperity.

Dear Abby

2008-04-10T18:18:05Z

This column is not a letter to Abby Van Buren. It refers to market strategist Abby Joseph Cohen who was demoted by Goldman Sachs for being perennially bullish.

The author, Ken Fisher, is a money manager and a columnist for Forbes Magazine. He has been writing the column for over 25 years. It has always been insightful and often times prescient. Read the column

In this column he reiterates the bullish stance that he has maintained all through the market turbulence. He likens this period to the correction in 1998 when the S&P 500 declined 19.3% and then went on to [substantial] new highs. Since the October, 2007 peak, the S&P 500 is down 18.6%. Both calculations are peak to trough (so far) on a closing basis.

I would make a distinction between this period and 1998. In 1998 the Fed was pursuing a deflationary policy that eventually led to the bear market of 2000-2002. This time around the Fed has pursued an inflationary policy. Couple the current Fed policy with the tax rate changes that are scheduled to take place and the stock market could run into much more serious turbulence beginning sometime in 2009-2010. For more on that see the previous post.

Ken's firm also publishes a website with daily commentary that I find helpful.

The Inflation Threat to Capital Formation

2008-04-10T08:38:00Z

If you don't read anything else this year about the economy and investing this year, this is the one to read.

It was written by Michael Darda who worked for Jude Wanniski at Polyconomics. In my humble opinion, Jude Wanniski was the man reponsible for reviving classical economics under the label "supply side economics". He played the roles of midwife and chronicler of the revolution (how's that for mixing metaphors?).

Apply the chart to past presidential elections and it will explain why Gerald Ford, Jimmy Carter and George Herbert Walker Bush all lost their bids to remain in office. It will also explain why Bill Clinton's two terms were an economic success.

Then think through the implications for the next president if the current trends already in place continue on course.

Fallacies Abound Amidst Market Uncertainty

2008-04-04T10:20:43Z

Excellent article by John Tamny who is a senior economist with H.C. Wainright Economics as well as editor of the RealClearMarkets website. Set aside some time to read the article because its worldview is classical economics, not Keynesian or neo-Keynesian economics that prevails today. Thus it will run counter to most everything you read or hear in the press today. However, viewing the world through the classical prism will enable you to come to a much better understanding of economic events. Read the article

The link that attracted me to the article was "Economic Myths Abound" and that is the point of the article . . . to demolish the economic myths conveyed by the talking heads.

The Mark to Market Fiasco

2008-03-19T15:47:55Z

This article discusses an issue that I have been pondering. While I may have missed it, I haven't seen anyone in the U.S. write on this issue. The issue is that assets held on the balance sheet have to be "marked to market"; i.e. they have to be priced at their current value and the resulting gain or loss then flows through the income statement. As I understand it, this rule applies even to assets that were purchased as long term investments. Read the article.

Currently, there are no bids to purchase many asset backed bonds. This lack of bids obviously makes it difficult to establish a current market value. Thus, banks and brokerage firms are forced to write them down dramatically even though the bonds are still making interest payments. These write downs have eaten into their capital putting them at risk of being insolvent. Other players stopped trading with any entity at risk of insolvency . . . which was anyone holding bonds backed by sub prime mortgages. Thus the credit markets froze.

This freezing up of the credit markets meant that there were too many dollars in the system given the level of transactions taking place. Hence the excess dollars went first into Treasury bills, notes and bonds and then into commodities as the only safe havens. After today’s action the latter may have lost safe haven status.

Of course, the other side of the coin is that when the financial markets return to normal the assets that have been written down will be written back up and the resulting gains will flow back through earnings.

One other factor is the requirements that Sarbanes-Oxley puts on top managements regarding the veracity of their financial statements. So managements have been aggressive in writing down assets to avoid putting themselves at risk of violating Sarbanes-Oxley.

11 Good Omens

2008-03-18T11:11:47Z

Doug Kass follows up the last article with another focusing on why the glass is "half full". Read the article

Dollar Bears

2008-03-18T06:16:14Z

At the risk of sounding like a broken record, Reuven Brenner hits the nail on the head as to how monetary policy ought to be conducted to return the United States (and the world) to a sound footing. Read the article

Ready for the Bear Stearns Challenge

2008-03-17T13:33:31Z

Doug Kass is a hedge fund manager and writes a column for The Street.com. His specialty as a hedge fund manager is selling stocks short; i.e. borrowing stocks to sell first hoping to buy them later at a lower price.

I have only been reading and listening to him (on Kudlow & Co) for the last few months, but have found him to be thoughtful and intellectually honest.

This analysis of the current situation strikes me as realistic. Read the article

Bush and the Dollar

2008-03-12T06:21:12Z

David Malpass, chief economist at Bear Stearns argues that the president should come out forcefully for a stronger dollar. He believes a stronger dollar is critical for our economic health as well as our national security. Read the column

I agree that a stronger dollar is vital to our national well being. However, once it regains its strength, it needs to be stable so that businesses and consumers can do long range planning with reduced uncertainty.

The secret to the economic success of the 1990's from a policy standpoint was three fold: (1) a relatively stable dollar from 1993-1996 with lingering effects into 1999, (2) a reduction of trade barriers, and (3) a reduction in the capital gains tax rate. All three parts to the prescription for economic health are disappearing.

Based on theFederal Reserve policy of the last 4 years, I still believe that an inflating CPI will be a serious issue for the second half of this year, as well as 2009, unless the economy rebounds strongly to soak up the excess dollars that were created. A strong economy is the best (only) antidote to inflation.

The World Has Plenty of Oil

2008-03-04T19:42:59Z

How about that for a provocative title? Nansen G. Saleri (former head of reservoir management for Saudi Aramco) makes the case that there is still plenty of oil left to recover.

Currently a field is considered depleted when one out of three barrels in the field has been extracted. Pushing that ratio to 50% or even 55% will dramatically increase the amount of oil available. Technical advancement and high prices should facilitate an increasing recovery ratio. Read the article.

I think two other factors also have to change for the oil to actually be recovered. The first is that we need a stable dollar. Gyrations in the dollar have more to do with the price of oil than worldwide demand. Jude Wanniski regularly made the case that monetary policy was the biggest factor in the price of oil because it was an impediment to proper planning in an industry that deals with 5-10 year lead times to bring new production on stream. If the Fed can get monetary policy right then maybe the other impediment can be addressed: shortsighted government policies.

Planners Wanted ASAP

2008-02-29T07:39:23Z

Newsweek's Jane Bryant Quinn advises boomers approaching retirement age to "avoid playing minnows to the sharks" as they seek advice regarding their nest egg. Read the article

The Laffer Curve

2008-02-26T15:11:21Z

The Laffer Curve is one of the most incendiary issues in modern public policy. There are extreme positions on both sides. Proponents say it is a remedy that will cure all ills including the common cold. Opponents on the other hand think that it is nothing but snake oil sold by Dr. Feel-Good.

Dan Mitchell from the Cato Institue is doing a series of videos for the Center for Freedom and Prosperity to explain what the Laffer Curve is and give the evidence for it.

The first 2 videos don't say this, but when you strip the Laffer Curve down to its essentials, it is the law of diminishing returns applied to tax rates. What it represents is a basic truism. How it is applied is where the debate starts. See for your self. Each one runs 7-8 minutes

Video 1 Video 2

There is also a third video in the works.

Unleashing the Exaflood

2008-02-22T09:13:10Z

The co-author of this article, George Gilder, has been one of the better thinkers over the last three decades regarding the future of technology. As you will see he is adamantly opposed to the FCC and Congress trying to regulate/legislate "net neutrality" for the Internet.

I would liken the FCC to cupped hands trying to catch the rain . . . what little they do catch quickly leaks through their hands and the rest of it goes around their hands. The rate of change on the Internet is far too rapid for bureaucrats to regulate.

Techno-Optimism

2008-02-21T14:01:43Z

Peter Huber is a columnist in Forbes and a senior fellow of the Manhattan Institute. His column in the February 25th issue opens with the following paragraph:

"Don't panic about subprime lending or rogue traders. This is a time to be optimistic. Prosperity and profit still depend, above all, on human ingenuity. Wetware is still the main asset you're holding in any well-diversified stock portfolio. No serious student of science technology can be anything but bullish about the long-term prospects for profit and growth in the ingenuity-driven economy."

Read the entire column

For those who wonder about "wetware" see Wikipedia's definition

Solar Companies Glow Despite Economic Slump

2008-02-19T19:29:01Z

This article discusses an example of how market forces will drive the supply of alternative energy sources. As the article notes, T.J. Rodgers, founder of Cypress Semiconductor, is a staunch libertarian and free market capitalist. However, his foresight to invest in solar power several years ago is bearing fruit. I have heard T.J. Rodgers speak on a number of occasions and he is every bit as colorful as the author describes him. Read the article

The Kiplinger Tax Rebate Calculator

2008-02-16T15:04:45Z

Want to know how much stimulus you can expect from Uncle Sam? Kiplinger's has posted a Tax Rebate Calculator. You will need to have prepared your tax return or at least have a good idea of your tax liability for 2007 in order to complete the calculator and get an estimate of your rebate.

John F Kennedy, 1960's Supply Sider

2008-02-16T12:47:48Z

Professor Mark Perry in his blog Carpe Diem points to the video of President Kennedy.

He says "In this video from August 13, 1962, when the highest marginal individual income tax rate was 91% and the highest marginal corporate tax was 52%, President John F. Kennedy announced his plan to introduce permanent, across-the-board tax cuts for both individuals and corporations. Kennedy argued that both "logic and equity" demanded tax relief for Americans, and that the dollars released from taxation would create new jobs, new salaries, and spur economic growth and an expanding American economy, thereby creating more tax revenues."

Watch the video

Read Professor Perry's complete post

The Ultimate Scholar

2008-02-16T12:30:22Z

Dr. Donald Boudreaux, chairman of the Department of Economics at George Mason University, observes the 10th anniversary of the death of Julian Simon.

"Although he never received the professional or popular acclaim of economists such as Milton Friedman, Paul Samuelson or F.A. Hayek, Simon's insights and work rank with those of history's greatest social scientists . . .

Julian Simon's legacy is profound. Free people are net producers. No economist has had a greater impact upon my own way of looking at the world than has Julian Simon. After 10 years, I still miss the wisdom and genuine kindness that flowed regularly from this remarkable man. "

Julian Simon was the economist who had the bet with Paul "Population Bomb" Erlich regarding the direction of the real price of commodities in the 1980's. This tribute is very worthwhile.

Our Children Will Be Lucky to Inherit Federal Debt and Federal Assets

2008-02-16T12:21:03Z

When we talk about the national debt we need to put it in perspective by adding in the national assets. When you look at your personal debt, do you view in light of the homethat you own? Of course you do. Your situation would look dire if you only looked at the mortgage without looking at the asset it finances. The same thinking can be applied to the national debt.

The real issue is that the federal governmnet does not distinguish between operating expenses and capital expenditures. At least if they do, it is not reported in the press. Thus, we assume that the debt issued by the U.S. Treasury is related to wasteful spending rather than the new federal building, the new highway or even the new bridge or overpass that Uncle Sam helps a municipality purchase. Read the article

That 'Stimulus' Nonsense

2008-02-13T12:24:36Z

Dr. Arthur Laffer is one of the few economists who correctly forecasted the economic debacle of the 1970's . . . and for the right reasons. He simply applied the law of diminishing returns to tax rates (also known as the Laffer Curve) and correctly predicted that severing the dollar from gold would lead to inflation in the true sense of the word.

In this article he shows that the stimulus package signed in to law today is actually a negative for the economy. Read the article

Government Stats Hide Inflation Truth

2008-02-12T10:03:37Z

I generally ignore articles with inflammatory headlines such as this one. However, Mr. Tamny's point is not malfeasance by the U.S. government, but that the US Treasury Department and the Federal Reserve Open Market Committee work from a flawed philosophy concerning the role of a currency. Read the article

I have argued that the dollar has been devaluing (or inflating) for several years. While it has yet to show up in the CPI reports (although the CPI is starting to accelerate), inflation has manifested itself in all the money thrown into mortgages, private equity loans and other assets that became collateralized debt obligations (CDO's). Now that some of these other avenues have been closed down, we should start seeing the excess money that was created show up in the official inflation statistics.

New Fidelity 'Lazy Portfolios' Are Winners

2008-02-05T08:18:31Z

"Three cheers: After a long six-year wait we finally have "Lazy Portfolios" using Fidelity index funds. Why did it take so long? After all, Fidelity's 19 million fund shareholders deserve the best too. A little background:

It all started back in 2002 when we posted the "Lazy Portfolio's Oscar Contest." I had stumbled across three successful well-diversified no-load index portfolios. All perfect examples of Modern Portfolio Theory. The response was huge. It morphed into a popular book, "The Lazy Person's Guide to Investing." But what really fascinated me was they all used Vanguard no-load index funds. . . .

Periodically we'd get asked about a "Lazy Portfolio" for Fidelity, the biggest 401(k) plan manager with millions of shareholders. For decades Fidelity left the no-load indexing business to Vanguard and built its reputation on actively managed funds. But in recent years Fidelity has dropped some loads and added some index funds in a challenge to Vanguard." Read the article from MarketWatch

Alan Greenspan and Buddy Holly

2008-02-04T15:36:10Z

Bob McTeer, former president of the Federal Reserve Bank of Dallas, observes the 49th anniversary of Buddy Holly's death in an airplane crash with an entertaining post to his blog. Read the article

Is the Economy Still Fine?

2008-02-02T08:37:47Z

Having posted Brian Wesbury's article "The Economy is Fine (Really)" I thought it would be a good idea to post his commentary on the weak economic data that was reported this week. These are one page reports so they are not heavy reading.

Read about the GDP report

Read about the January Employment Report

Both of these reports will be revised significantly so don't go into "recession mode" based on them.

Also, the economic data is reported in terms of month to month or quarter to quarter change that relies on "seasonal adjustment" to facilitate the sequential comparisons. I prefer to look at the data compared with the previous year number to try to avoid the seasonal adjustment distortion. The year to year comparisons show a slowing economy but not one that has entered recession.

What Brian points out about inventories in the GDP report is particularly relevant.

Riding the Dollar

2008-02-02T08:22:15Z

This article discusses the sometimes large contribution that changes in the foreign exchange value of the dollar has on the performance of foreign market mutual funds and ETF's. Read the article

China Demands a Revaluation of the Inch

2008-01-30T09:06:53Z

Tongue in cheek article that points to why we need a stable dollar. Floating exchanges rates and poor monetary policy distort the price signals that are so important to an economy. Businesses have to rely on prices to know when to increase/decrease production and capacity. Distorted price signals usually lead to overproduction (see housing for the last 5 years) or underproduction (see oil for the last 50 years). Read the article

The Economy is Fine (Really)

2008-01-28T07:45:49Z

Brian Wesbury continues to argue that the evidence on the economy argues for no recession. See the article in the Wall Street Journal.

Also, Brian had an interesting exchange with Jim Cramer on CNBC. See the video

Fed Bounced?

2008-01-25T12:51:22Z

Its interesting to note that the market action last Monday was not all related to the "fundamentals" of the world economy. While the U.S. celebrated Martin Luther King Day stocks in the rest of the world were coming apart at the seams. It turns out that a trader at the French bank, Societe Generale, had been entering huge unathorized trades that turned out to be losers. A significant part of Monday's action may have been the unwinding of those trades.

The losses generated in the world markets then prompted the Federal Reserve's Open Market Committee to cut the fed funds rate by three quarters of a point.

See a pundit's comments from BBC radio.

Also see news report on MarketWatch.

A fact that doesn't get much discussion is the amount of trading on the exchanges that is done by the large investment banks for their own accounts. In the week that ended January 11th, 27% of the trading on the New York Stock Exchange was "program trading". That percentage was down from 31% the previous week. A lot of the volatility we experience comes from these trades which are computer driven for the most part.

The Tax Threat to Prosperity

2008-01-25T10:58:27Z

Arthur Laffer, the modern day father of supply side economics (also known as the resurgence of classical economics) works through the mechanics and the rationale of the effect that marginal tax rates have on tax receipts. Read the article

Tax the Rich and Starve the Poor

2008-01-25T10:57:05Z

Excellent article about how tax policy affects investment returns. Read the article

Say's Law is Still Relevant

2008-01-23T14:41:08Z

George Melloan's op-ed piece in today's Wall Street Journal distinguishes between classical economics, now known as "supply side" economics and Keynesian economics. The relevant paragraphs are:

"Keynesianism crashed in the 1970s, when the U.S. suffered slow economic growth and high inflation: "stagflation." There was nothing in Keynesianism to explain this phenomenon. But there was an easy explanation available in classical economics, the simple principles that Ronald Reagan -- who learned at an early age that he had to work to eat -- understood very well. The so-called "supply-side" movement was nothing less or more than a return to these simple principles. . . .

"Clearly stock markets around the world aren't cheered by all the current talk of stimulus and a further cheapening of the dollar: They know all too well how politicians can convert adversity into catastrophe. Instead, the right policy is to make the Bush tax cuts permanent and pull up regulatory weeds, like Sarbanes-Oxley. Sound money and relief for producers is the best anti-recession prescription. It worked in 1981 because it was good policy. Say's Law is just as valid today as it was 200 years ago."

Read the full article

It's All About Risk Taking, Not Rebates

2008-01-21T13:32:18Z

Paul Hoffmeister addresses the shortcomings of the proposed economic stimulus packages. At the margin producers have to be willing to take the risk of producing before the economy will grow. Trying to inject a one time "demand" stimulus will be as ineffectual as it was in 2001 and in the 1970's. Read the full article

What Can We Infer from $900 Gold

2008-01-21T13:28:54Z

Paul Hoffmeister, current chief economist at Bretton Woods Research and formerly Director of Market Research and Chief Economist at Polyconomics writes:

"Much is being written about gold these days as its price reaches record highs. Two of the most disconcerting things being written are: 1) that gold’s soaring price is a result of increased demand from overseas, and 2) that gold should be adjusted for inflation. These conventional ideas spawn from a basic misunderstanding of the yellow metal."

Read the full article

Markets and the Dollar

2008-01-21T13:06:39Z

David Malpass argues in the Wall Street Journal

"To fight financial market turbulence and a slowing economy, the Fed has injected extra liquidity, cut the discount rate and cut the fed funds rate a full percentage point. As it prepares to hit the rate-cut panic button harder, the Fed should also try using its most powerful tool, a stronger dollar, to draw liquidity into credit markets, reduce oil prices and restart economic growth." Read the full article

Let's Not Panic and Ruin the World

2008-01-21T12:51:03Z

Brian Wesbury, chief economist at First Trust Portfolios, LP, says "This desire for government intervention to fix problems that grown adults have created for themselves is dangerous. Constantly counting on the government to save the economy undermines confidence in free markets, conditions people to believe they don't have to live with bad decisions, and creates a willingness to take imprudent risk. Actions to stabilize the economy in the short term can destabilize it in the longer term, and set the stage for even more intervention to fix the new problems at a later date… Read the article

An Engineer Measures the Falling Dollar

2008-01-21T12:45:51Z

The magnitude of our fundamental unit of market value is not defined -- and that’s the problem.
he U.S. dollar is in a scary slide. Gold and oil are hitting record highs, while the dollar is hitting record lows. To get how strange this all seems to an engineer like me, imagine the following headline: “Foot Falls against Meter for Fifth Straight Day.” Read the article

The Truth About the Crash of 1987

2008-01-21T12:38:01Z

Don Luskin confesses his role in the 1987 stock market crash Read the article