Wednesday, February 29, 2012

Getting Snarky . . .

Today, it was announced that Google (whose corporate motto is "Do no evil") is being investigated in Europe concerning the legality of Google's new privacy policy.

Good . . . it couldn't happen to a better thug!

Carrying the Water for Politicians

The European Central Bank announced their second round of Long-Term Re-financing Operations" or LTRO this morning.  It was bigger than the first round, and over 800 banks signed up.  The European markets rallied on this news.

But, what is it?  Consider that the interest cost of government bonds in Europe has increased significantly, which starves their national budgets and spending plans.  Getting those costs down is a substitute for raising taxes or cutting entitlements, which politicians lack the courage to do.

Also, consider that the ECB told European banks a year ago to raise additional capital, so they would be strong enough to absorb expected losses.  Unfortunately, the banks found very few investors willing to inject additional capital and therefore failed to raise the capital as instructed by the ECB.

Today's LTRO announcement allows the ECB to make an additional $700 billion in loans to banks at a rate of only 1%.  Those banks must give collateral for the loans.  So, they buy government bonds as collateral for the ECB loan.  As the demand for government bonds is then increased, the price goes up, which drives down the interest rate, allowing the governments to sell bonds at lower interest rates.

Now, if the bank borrows at 1% from the ECB and buys a bond paying 4%, then the bank is making 3% pure  profit, which adds to their capital.  (3% on $700 billion each year will buy a lot of coffee at Starbucks!)  Thus, the ECB is making it easier for banks to fulfill the requirement to increase their capital.

Lastly, this LTRO program restored short-run confidence and stabilized the financial crisis in Europe, which was a spectacular success.  It is just another example of monetary policy being forced to compensate for the failure of fiscal policy (read democratically elected politicians).

The Confident Weakling

Yesterday, we learned that consumer confidence has risen to a one-year high, improving from 61.5 to 70.8 in the last month alone.  It is interesting that their confidence has risen at the same time as gasoline prices have risen.  This is unusual.  Their confidence in the improving labor market is greater than their anxiety about rising gas prices.  (I suspect the lack of scary headlines from Europe also contributed to their improved confidence.)

But, does it really matter?  Historically, consumer spending is 65-70% of our GDP.  Increased spending by consumers flows from their increased confidence.  Unfortunately, the U.S. consumer is still so deeply in debt (which they are working hard to reduce) that they cannot significantly increase their spending to match their increased confidence.  That is a major reason this recovery continues to be painfully slow.

The danger is that consumers may start spending before reducing their debts more.  This may be great in the short-run but bad for the country in the long-run.  (Encouraging the weak minded to spend must be a sin somewhere?)

Also, my 2012 forecast was that the market would improve by the second half, as uncertainty declines over Europe, China, and the presidential election.  To my relief, uncertainty over both Europe and China is declining.  However, to my surprise, economists are already debating whether uncertainty over the election has started to decline, because the average investor is assuming President Obama will be elected.  Most economists agree the market will go up, regardless of who is elected, but expect it will rise more if Romney is elected.  One can only wonder if this is also good in the short run but bad in the long run . . . or not?

Anyway, I'm tired of being a weakling . . . see you at the gym!

Monday, February 27, 2012

A Survey of Economists . . . zzzzzzzzzzz

As a long-time member of the National Association of Business Economics, I pay close attention to their forecasting survey.  Here is the bottom line on the latest survey, which was just released this morning:

  • The NABE Outlook Panel of 45 forecasters continues to predict moderate real GDP growth through 2012. Economists expect the economy to grow 2.4 percent in 2012, with GDP growth slightly stronger in the second half of the year than in the first.
  • Employment growth brightens. Panelists increased their anticipated average monthly job change to 170,000 in 2012, which would result in an average annual unemployment rate of 8.3 percent. NABE forecasters expect stronger job growth in 2013 with the unemployment rate falling an additional half percentage point to 7.8 percent.
  • Consumer spending to remain subdued. Even with higher employment forecasts, real consumer spending is forecast to increase only 2.1 percent this year and 2.3 percent in 2013. This rate remains below the historical norm of 2.8 percent and is consistent with a positive but below-trend recovery. Light vehicle sales are anticipated to grow at a solid pace of 14 million units this year and 14.6 million units in 2013, up from 12.7 million units in 2011.
  • Housing starts are expected to increase 19 percent in 2012. The economists surveyed expect housing starts to reach 700,000 units in 2012, up from 610,000 in 2011 and an upward revision from the November forecast. The forecast for 2013 shows continued improvement, with housing starts reaching 850,000 units. Correspondingly, real residential investment is forecast to increase 6.6 percent in 2012, slightly higher than the 4.3 percent predicted in November, and then strengthen further, rising 10 percent in 2013. The projection for home prices in 2012 was lowered slightly from a projected increase in the FHFA index of 0.9 percent (Q4/Q4) in the November survey to home prices remaining unchanged in the February survey. In 2013 home prices are expected to increase slightly more than 2 percent.
  • Panelists continue to forecast strong business spending growth. The outlook for spending on real nonresidential equipment and software in 2012 was marginally revised upward to 8.1 percent, and panelists forecast a lower but still solid 7.3 percent in 2013. The projection for real spending on nonresidential structures for 2012 was lowered slightly from that in the November survey, to 4.2 percent, but in 2013 the growth rate is expected to pick up to 5.1 percent. Industrial production is expected to increase moderately at 3.5 percent in 2012 and at 3.3 percent in 2013.  
I have argued for many months that this recovery is sustainable but relatively weak.  That is because it is a de-leveraging recovery.  It takes time to work off debt.  This also explains why consumer spending will remain subdued and that average unemployment for 2013 is expected to still be a high 7.8%.  

I was also not surprised that there is agreement on the continued strong growth in business spending, as business was never as highly-leveraged as the consumer.

But, I am surprised by the optimistic outlook for housing and plan to study this more.  Hopefully, I'm wrong, and they're right!

Sunday, February 26, 2012

For Whom the Bell Tolls

In the final scene of Ernest Hemingway's 1940 classic, the American Robert Jordan lies wounded.  He awaits his certain death at the hands of General Franco's soldiers, but he is determined to take as many of those soldiers with him as possible.  He never knows the outcome of the Spanish Civil War.

Mario Draghi is the new head of the European Central Bank.  In four short months, he has proven himself far more agile and creative than his longtime predecessor.  In the mold of Ben Bernanke, he deserves much credit for stabilizing the European debt crisis.

This weekend, The Wall Street Journal ran an interesting article on his views of how Europe is changing and will continue to change.  He confidently predicts greater fiscal integration, which means more centralized governance from Brussels and less from each nation's capital.  More interesting, he sees the famed European social contract of generous benefits and great job security as a dying relic.  That social contract was the envy of the world, including the U.S., for many decades.  Those dreams are dead.

As an American, I know the death of generous benefits and job security is coming to our economy as well.  In the end, we will be a stronger economy and a stronger people.  However, getting there will be painful.  The continuing demands of labor unions and government employees for generous benefits and job security will be the enemy soldiers.

The good news is that, even if we don't live long enough to see the new American social contact, I do know the outcome of this war.  We will be a stronger nation and a stronger people, less reliant on big-brother institutions.  We will have a balanced budget and enough foreign reserves to embarrass even the Chinese.

That is not uninformed boosterism or unbridled patriotism or even simplistic optimism.  It is recognition that the creative if cantankerous nation still has massive natural resources, geographical strength spanning two oceans, excellent higher-education, and a passion for competition.  Draghi sees good times ahead for Europe.  I see better times ahead for America.

I just hope it is a short war . . .

Thursday, February 23, 2012

Holding My Breath . . . Nope!

Suppose you have a first cousin living in California and another one living in Texas.  You trust and respect them equally.  Both of them have an investment proposal for you.  You like each proposal equally.  Incredibly, each proposal projects the same revenue as the other.

However, one of the proposals shows higher expenses, which means lower profits for that proposal.  Do you really care if the higher expenses are due to rent, labor, or taxes?  No, you are focused on the bottom line, i.e., the profits.

But, wait . . . one of those expenses is taxes!

My point is that corporate tax is just another corporate expense.  Increasing that expense reduces profit and the value of the investment.

Yesterday, the President proposed decreasing the top marginal tax rate for corporations from 35% to 28%, which sounds great.  At 35%, our country has one of the highest stated corporate tax rates in the world.  However, the actual rate is only 12.1%.  This huge difference is due to the many, many tax breaks allocated to certain industries, but not all.  It is a Christmas tree of loopholes for businesses with the best lobbyists.

President Obama wants to reduce the top rate and eliminate most of the loopholes.  The end result will be that American businesses will actually pay more in taxes.  Therefore, his proposal is dead-on-arrival.

There is a perception that business does not pay its "fair share" of taxes.  My belief is that business should pay nothing in income taxes.  Businesses are neither good nor evil.  They may occasionally do something evil or bad, but that is because management is bad.  A tax on business is just an indirect tax on investors.  If you want to tax investors, then tax them directly.  Why tax an artificial entity that simply passes through income, like corporations?

So, which cousin do you invest with?  The one with the lower taxes, of course!  Capital or money flows where it is treated best, whether it is California, Texas, or Israel or China or wherever.  Taxes are just another cost of doing business.

After much thought, I've decided not to hold my breath until corporate tax expenses are eliminated . . .

Wednesday, February 22, 2012

The Smell of Napalm in the Morning . . .

There is an old Wall Street adage that you should buy when you hear the cannons fire and sell when they fall silent.  In other words, if and when Israel attacks Iran's nuclear reactors, stock markets around the world will fall, which is a good time to buy.  When a sustainable truce is announced, the markets will rise, which is a good time to sell.

This adage have more value for the short-term traders than it does for investors who invest for the long-term and ride through down-markets.

However, applying that adage to the new Greek settlement, traders heard cannon fire, and stock markets rose in January in anticipation of the pending Greek settlement (and other factors as well, of course).  Traders were buying lots of stocks.  Still, there was an expectation that the traders would sell-off when the deal was announced.  Instead, there was very little reaction.  In fact, the Dow even flirted with 13,000 for awhile.

What does this tell me?  Traders don't know whether to buy or sell because they don't know if this deal will work or not.  (This morning, one of the major credit rating agencies downgraded Greece, saying a default was imminent.)  Lastly, because long-term investors did not rush in to bid up the market, that tells me they also don't know if the deal will work or not.

Still, I think the all-important risk of systemic failure has been greatly reduced by the ECB's new LTRO program.  In addition, the new technocratic leader of Italy is making real progress in opening up that huge economy. And, while every nation is different, the Greek deal does provide a useful template or starting point for any future bailouts, such as Portugal.

While cautious, I remain bullish . . . for now.

A Thug By Any Other Name . . .

First, The Wall Street Journal tells me that Google is violating its own Privacy Policy and sharing information on users.  As I value my privacy and that of others, I felt violated.

Next, I cannot access my blog, which I have written for years.  I learn that I must download Google's new browser, Chrome, in order to access my own blog.  Surrendering to The Thug, I paid their extortion demand and did so, even though I was satisfied with whatever browser I had.

At this point, I do not know if this post will appear on my blog or not.  I don't know if past blog postings are still available or not.

Of course, in a theoretical world, I could have refused to pay the ransom to access my own blog and NOT download whatever Google wanted me to download.   Of course, this is the real world, where a Thug by any other name is still a Thug!

At this point, I do know that Google has also violated its own motto of "Do No Evil."
Just for the record, I have been a long-time fan of Google but am mad-as-hell right now.  First, I read in the Wall Street Journal that you ignore your own privacy policy.  Now, I cannot find my blog, which I have labored over for years.  Then, you force me to download a new browser, when I am perfectly happy with whatever I had.  I would gladly have paid a lot of money to avoid all this hassle, waste of time, and loss of privacy.

How could you do this?  Have you no decency?

Sunday, February 19, 2012

Framing the Election . . . ??

Americans usually demand excellence but, being realists, accept something less.  Our political debate often looks for the best or most excellent solution to problems.  But, the politics of the possible makes us accept something less.

Readers will recall we live in a tri-polar world of economics.  We have Austrian economics, which argues that the budget should be balanced EVERY year and is often called the "tough-love" school of economics.  We have Keynesian economics, which argues that the budget should be in deficit during recessions and in surplus during economic expansions.  And, we have Supply-Side economics, which argues that expansion occurs only when the top marginal tax rate is decreased.

Each of the three schools of economics has their own predictable solutions to reducing the dangerously-high national deficit.  However, one of my favorite pundits is John Mauldin, a small guy with a large family in Dallas.  As he is largely self-taught, he often brings original thoughts to the conversation.  This is a comment in his most recent newsletter:

"Let me shock a few of my fellow Republicans and say that I think the deficit is such a deadly disease that it would be better for the country for the Democrats to be in power and forced to deal with the situation than to do nothing. I would not like their solution, and I think it would be harmful, but not as harmful as a second Depression, brought on by not dealing with the deficits and entitlement problems.

As a businessman, I would rather pay higher taxes on profits than to have no profits at all. Just tell me the rules and I will figure out how to adjust. A Depression to would mean 20% unemployment (at least) and a real lost decade, with the Boomer generation trying to figure out how to deal with no money and no jobs and being old."

In other words, the choice is not between Obama and Romney or whomever.  The choice is between a Democrat who would be forced by the credit markets to deal with the deficit now or a Republican who would not be able to accomplish anything due to Democratic opposition.
Looking at the election this way, I could easily become either too depressed or too sober . . .

Saturday, February 18, 2012

Market Timing?

January was the best month for the stock market in 25 years.  Unfortunately, a huge number of retail investors have been so shell-shocked by the 2008 collapse that they still remain on the sidelines.  This is one of the primary reasons why trading volumes on the New York Stock Exchange and others have been so low.

So, the question becomes whether it is too late for them to benefit from the current bull market?  Take a look at this chart:

In the last 111 years, there have been 13 bull markets that followed bear markets dropping at least 30%, which means there is one about every 8.5 years.  This chart shows me that this bull market is still quite young.  (More surprising to me is that the strength of this market is about average, even though the economy is growing more slowly due to de-leveraging.)

The point is that history suggests it is NOT too late to get back into the market. 

Of course, not only is past investment performance not any guarantee of the future, neither is history, darn it!

Monday, February 13, 2012

Extend and Pretend

First, a little review of Accounting 101 -- If you subtract total liabilities from total assets, you get net worth or capital.  If you sustain a loss on the sale of an asset, you decrease net income by the amount of the loss.  If you have no net income, you must decrease net worth or capital by the amount of the loss.  For banks, if you expect a loss on a loan repayment, you must decrease net income by the amount of the expected loss.  If you have no net income, you must decrease net worth or capital by that amount.  Thus, when banks are running short of capital, they don't want to recognize any loan losses, because they have no income and must decrease their net worth, making the capital shortage worse.

Years ago in Texas, I was appointed by the Governor to serve on the four-member Texas State Depository Board with the State Treasurer, State Controller, and State Banking Commissioner.  This was during the infamous "Savings and Loan Crisis."  As those financial institutions had no income, they were forced to decrease their capital or net worth every time they had an expected loss on some loan, that would not be repaid in full.  Not surprisingly, they were reluctant to admit any loan was bad loan.  They were motivated to extend any loan that came due and pretend they would eventually receive full payment, i.e., "extend & pretend."

Of course, as regulators, we were always suspicious of any financial statements, as they may not be properly recognizing loan losses.  In addition, the outside auditors checked for evidence of this accounting practice.  Eventually, the crisis passed . . . after taxpayers lost about $300 billion.

I think we are seeing the same thing again, only on a vaster scale.  The recent Long-Term Refinancing Operation (LTRO) of the ECB essentially tells European banks that no loans are due for three years and that no losses should be expected at this time.  Quietly, over the weekend, the Chinese government told their banks to rollover or renew all municipal bonds/loans for the next three years and pretend those bonds/loans contain no losses.

"Extend & Pretend" was an accounting trick used by Texas financial institutions.  Then, a central bank practiced it.  Now, a major government is doing it.

This is more than just "kicking the can down the road," because we don't want to deal with a problem now.  It is buying time during a crisis.  Monetary policy is being used to buy enough time for fiscal policy to do whatever needs to be done, i.e., decrease entitlements and increase taxes.

Fortunately, it also buys time for the bulls to run . . .

Saturday, February 11, 2012

On Wealth Watching

We have spent the last four days on Jekyll Island, a lovely resort of gentility and Spanish Moss.  It was originally founded 125 years ago by the famous "Robber Barons" as a place to escape the awful New York winters.  They spent lavishly on their 5,000 square foot "cottages."  Their clubhouse even had a restaurant to rival their favorite restaurant back home, the legendary Delmonico's in lower Manhattan.  They spent their days in fine style, indeed.  The men wore suits and neckties to hunt.  The ladies wore long dresses and hose to ride bikes.  They dressed the same for the beach.

As succeeding generations customarily become more indolent, they also become less interested in gentility and Spanish Moss, preferring more "exciting" places to vacation.  Eventually, this lovely place fell into the hands of the government of Georgia, which has done an excellent job of restoring it and commercializing it.

I was pleased to watch other tourists gawk at the ostentatious cottages but in a respectful manner.  Unlike France where the homes of the rich were sacked after the French Revolution, people here merely admired the ostentation of the Robber Barons with a wry smile and a knowing look.  There was no obvious envy, merely wry amusement.  That speaks well of both America and Americans.

Of course, I heard the term "Robber Barons" one time too many and finally suggested the tour guide refer to them as "job creators" instead.  For some reason, I was promptly heckled by the other tourists.  Did I go too far and get too political? 

Friday, February 10, 2012

The Fat Lady Has NOT Sung Yet

Yesterday, the headlines screamed there is finally a deal to solve the Greek financial crisis.  Yet, the stock market barely reacted.  Why?

Frankly, the market doesn't believe it.  The announcement was made only by the Greeks.  (The "troika" still have a few more conditions they insist must be part of the package.)  Greece has unfortunately lost creditability in the marketplace.  They have made numerous promises that have been "postponed" due to voter opposition.  In fact, we are witnessing one of the few disadvantages to democracies, i.e., that voters will vote to give themselves benefits when convenient but not to take them away when necessary.

There is also an increasing comfort level with Greece no longer being part of the European Union or maybe becoming a second-class member of the Union or even dropping the Euro in favor of some "Euro-lite" instead of their old Drachma.  Whatever happens, if I were a Greek living in Greece, I would be buying a plane ticket somewhere else.

The "Selling" of Conservatism

America entered the 1960's as a simple and trusting nation in many ways.  One was that we liked to believe that the election of a president was a serious, thoughtful, and intellectual exercise.  However, in 1969, I read a then-controversial book by Joe McGinniss entitled The Selling of the President 1968.

McGinniss' book showed us that electing a president of the Free World was not unlike getting a housewife to pick a detergent at the grocery store.  A particular presidential candidate was just another product to be sold.

 A week ago, New York Times columnist David Brooks wrote a column entitled "Flood the Zone."  In it, he discussed the one-sided advantage that liberalism has over conservatism, i.e., understandability.  If someone says to me "the government will remove the uncertainties of economic cycles, ill health, old age, poverty, and so forth from me," I understand there is less for me to worry about.  However, if someone says to me "it is a complex but wonderful world out there, which will help you with your uncertainties," then I understand I still have much to worry about.

In other words, conservatism does not lack compassion.  It lacks clarity.  It lacks sound bites.

A few days ago, a friend wrote an excellent piece on the Brooks column, pointing out that conservatives do a poor job of selling an approach that is demonstrably more effective in solving the problems of uncertainty, almost begging the question of how to "sell" conservatism, which lacks that understandable clarity and, more important, lacks those critical sound bites.

Most marketing professors would argue the first step is to develop an inclusive marketing plan, and I would agree with that, except WHO has input into developing that plan.  Developing that marketing plan, in public or in private, would be a hugely difficult task, even though it would be well worth it.

If I could make one contribution, I would suggest that the old construct of "liberalism vs. conservatism" be discarded in favor of Ayd Ryan's construct of "statism vs. freedom."

Joe McGinniss would probably argue that selling an idea is still no different than selling a President . . . or even selling a detergent.

Tuesday, February 7, 2012

The View from Up North

TD Bank (think Toronto Dominion) is the second largest bank in Canada and the eighth largest in the United States, which few people know.  It is also the largest shareholder of trading giant TDAmeritrade.  Last Friday, I listened to their chief economist's slightly Canadian view of the U.S. economy.

They see the world dividing into two speeds.  The U.S. remains in the slow speed lane.  He expects our recovery to also remain slow speed.  Still, he expects our stock market to end the year in "high, single digits."

He is not worried about inflation, as the velocity (V) of money (think GDP = MV = PT) has fallen to only 1.6X.  That means increases in money supply (M) are not readily causing inflation in prices (P).  What he didn't discuss was that a surge in consumer confidence could create inflation before the money supply could be drained significantly.

The biggest obstacle to a strong U.S. economic recovery is our homes, which have already dropped in value more (percentage-wise) than they dropped during the Great Depression.  We still have 14 months of inventory, compared to a more healthy level of only 4 months.  While he didn't suggest a solution for this, he did wade into the political arena when he stated our stimulus program clearly prevented a major depression.

With respect to the European financial crisis, he believes there will be an inevitable political solution, pointing out the Euro was originally created for political reasons, not economic ones.  Europe has always expected a crisis to bring them closer together.  Well, they got the crisis.  Now, get together . . . please!

Sunday, February 5, 2012

Some Things Never Change

In the sixth century Before Christ, the poet and philosopher, Lao Tzu, observed "Those who have knowledge don't predict.  Those who predict don't have knowledge."

So, why do economists make predictions every year?  Because the supply of predictions will rise to meet the demand for predictions.  So, why do people demand them?  Behavioral psychologists tell us there is a normal human need for "anchors," which are used to compare other events.

For example, weathermen have notoriously bad records as forecasters.  Nonetheless, we try to listen to them every day.  We know they're probably wrong but they usually give us some useful ballpark expectation.  The father of Keynesian economics, Lord John Maynard Keynes, once said "I'd rather be generally right than precisely wrong."

My earlier forecast for the stock market was that 2012 would be up modestly, unless we had a financial heart attack from the European financial crisis.  With the unprecedented enactment of the LTRO (Long-Term Refinancing Operation) by the ECB, it looks like the possibility of a systemic heart attack is substantially reduced.  Indeed, I heard former FDIC Chairman Sheila Bair on Wednesday say that it was time to stop worrying about that.

Another bullish indicator is that investors have stopped buying value stocks and developed a relatively strong appetite for growth stocks.  Because market volume is so low, that will remain a weak indicator.

I remain slightly bullish for the market this year and am less worried about that financial heart attack from Europe.  Sanguine is a good word for it.

Saturday, February 4, 2012

A Blizzard of Paper

In keeping with the age-old tradition of shooting the survivors, it was not surprising when regulators of financial advisors flooded us with confusing new paperwork to somehow better protect investors from advisors like Bernie Madoff (who had been audited by both the SEC and FINRA several times.)

Today, I attended a class on the new rules being imposed on CERTIFIED FINANCIAL PLANNER (R) professionals like myself by our professional regulatory body, the CFP Board.  There is an amazing amount of disclosure required.

For example, I must now get a client's signature so that they know whether or not they asked me to evaluate their need for long-term care insurance and, if so, what that recommendation was and, lastly, whether the client chose to implement that recommendation.  Obviously, that doesn't disclose anything the client doesn't already know, but it is for the benefit of heirs.  And, this is only one example.

Anyway, that means more paperwork for my clients, and I apologize for that.  Yet, the combination of increased paperwork from both the government regulators and the professional regulators is a well-meaning effort to protect investors, and I will do everything I can to help.

Good News From DOL

Yesterday's monthly Jobs Report that our nation created 234 thousand jobs in January was very good news indeed.  It was about 90 thousand more than expected.  The report also reported that almost 50 thousand more jobs were created in December than earlier reported.

While it is great that the unemployment rate dropped nicely from 8.5% to 8.3%, that has more political significance than economic significance.  I expect that rate will rise between now and the November election, as discouraged workers, who had given up, realize there might be a job for them out them and re-enter the workforce.  That increased Labor Participation Rate will cause the unemployment rate to increase.  Republicans will talk about the unemployment rate, and Democrats will brag about the number of jobs created.

One indicator I follow closely is the Quit Rate, which measures how many people voluntarily gave up their job last month.  Workers are not likely to resign during such massive unemployment unless they have another job or faith they can get another job.  That number has been rising steadily. 

As predicted, the economy is producing more jobs than widely expected, because the economy is stronger than most people realize.  Last month, both the IMF and the World Bank decreased their estimates of GDP growth world worldwide.  I guess American employers didn't get that memo??

Friday, February 3, 2012

The Venerable NeoCon

Nobody ever accused former Vice President Cheney of being "warm and fuzzy."  Still, he looked small and frail earlier today, even straining somewhat to open a bottle of water.  But, once he started talking, I remembered why he was nicknamed Darth Vader.

He believes any withdrawal from either Iraq or Afghanistan is a tragedy.  He considers it "likely" that terrorists will hit the U.S. with a nuclear weapon.  He may be correct, but how do you prove the negative that it might not?

He was asked what could be done to end the gridlock in Washington.  I was disappointed that he limited his comments to denouncing the Democrats' fight to protect entitlements.  While that is a problem, it is certainly not the only problem with Congress.

Humorously, he recounted the story of how he is distantly related to President Obama -- cousins eight generations ago.  He didn't discuss either the markets or the economy.

Truth-In-Blogging:  I liked his boss a whole bunch more than him and wonder if history will agree.

Risk-Adjusted Challenge

One of the more difficult communications challenges for financial advisors is getting across the idea that a number means so little.  For example, is 4% a good return or a bad return?  If you take minimal risk and get 4%, then it is probably a good return.  If you take a great deal of risk and only get 4%, then it is probably a bad return.  A more meaningful number would be how much risk did you take, which is impossible to quantify.

I met an advisor who had a clever way to explaining this concept of risk-adjusted returns.  Suppose your son gets a new job.  On his first day, he realizes there are two logical routes he can take to drive home.  One route takes him through gently-rolling countryside of well-maintained roads with little traffic.  The other route takes him through an urban area known for gang wars and car-jackings, travelling on poorly-maintained roads and decrepit bridges.

That afternoon, he puts the roof down on his Mustang convertible and enjoys a leisurely drive through the countryside, arriving home in 27 minutes.  The next day, he puts the roof up on his Mustang convertible, keeps a pistol on the passenger seat, while making jack-rabbit starts through the slums but still arrives home in 27 minutes.

Which is the better route, and why can't you quantify the difference in risk?

Thursday, February 2, 2012

The Open Gates

For the list of the Top Ten Best Lifelong Public Servants, I nominate Robert Gates, former Secretary of Defense.  Fresh out of college, he started with the CIA, eventually becoming the first head of the Agency to have worked his way up thorough the ranks and later the 22nd Secretary of Defense.  A moderate Republican, he served seven different Presidents, both Republicans and Democrats.

I was fortunate to hear him speak today at a conference of financial advisors.  He spoke at length about the wars in Iraq and Afghanistan.  He was remarkably candid in saying that ten years is not enough time.  While I understood and agreed with him that the Taliban will likely take control of Afghanistan if we leave too soon, it is nonetheless something we cannot afford to continue UNLESS we raise taxes AND/OR cut entitlements to pay for it.  The "Sophie's Choice" facing us is between allowing radical Islamists to have their own nation and attacking us another day or bankrupting America and handing it over to the Chinese.

He also lamented that our nation has become ungovernable and wondered when the word "compromise" became a dirty word.  He listed three causes making our government dysfunctional.  The first one was redistricting.  The only real elections to purge our system of extremists are the primaries, but they actually favor the extremists -- when the district voting lines are drawn to make districts safely Republican or safely Democrat, either very conservative or very liberal.  There is no room for moderates, who don't think compromise is a dirty word.

Lastly, he apologized for being somewhat pessimistic today but then emphasized that he is as bullish on America long-term as ever.  And, I believe him!  He is a good man, and I appreciated his openness today.

A Romney Rally ?

Years of presidential elections are usually positive.  Most of the upside occurs when the market "thinks" it knows the winner.  Regardless of the party winning, the market tends to rise as uncertainty goes down.

However, the market tends to do better that year if a Repubican wins.  Over the four-term term of the presidency, the market tends to do better if a Democrat wins.

After Romney's convincing win in the Florida primary Tuesday night, the Dow rose over 130 points at one point and closed up 88 points.  While the lack of bad news out of Europe helped a great deal, it was a reminder of just how much the market wants Romney to win.

Wednesday, February 1, 2012

One Gestation Period Away

My mother always told me "if you can't say anything nice about a person, then just shut up," which I still think is good advice.  As a result, it has been painful for me to be in Florida the last few days and watching the attack commercials on TV, leading up to yesterday's Republican primary.  As a whole, they have been brutal, deeply personal and intellectually offensive.

If I still had kids at home, I would be indignant they could watch this behavior on TV.  Such diatribes should be late night and only on cable. 

I already had some reservations after the Citizens United decision by the Supreme Court to allow unlimited money into the election cycle.  But, my respect for conservative intellectual George Will is so great, I deferred to his absolutist argument that freedom of speech should not be constrained by money.

After seeing the impact up close and personal here in Florida, I've changed my mind.  Freedom of speech does not permit yelling "FIRE" in a public theatre.  Freedom of speech does not permit someone to give pornography to children.  How then can we excuse the behavior of ad-men airing such commercials?

Certainly, it has been written many times that negative campaigning works, but the effect of Citizens United has been to unleash a tsunami of deeply personal negative advertising. While that was an unintended consequence of the decision, it has clearly been a consequence of now permitting unlimited money into American elections.  Another consequence is that there is now unlimited money to convince people of all ages that politicians are all slimy crooks.  Is that good for the country?  Isn't there more to life than merely electing a particular candidate?

I dread the fall campaign.  Whatever happened to intellectual debates, like the famous Lincoln-Douglas debates, when important things were argued.

The good news is that it will all be over in nine months . . . before it starts again . . .