Throwing Out the Baby . . .

I attended a fascinating lecture late yesterday by Carolyn McClanahan, who is both a physician and a financial planner.  She has actually read the entire bill on ObamaCare and has become one of the leading experts on the subject.

When she wears her hat as a financial planner, she doesn't like the individual mandate.  However, when she wears her hat as a physician, she lists the many things she does like about the bill.

Both humorously and sadly, but before saying something good about ObamaCare, she felt it necessary to show her Republican credentials and showed a photograph of her and Mitt Romney sitting together on a plane.  Nonetheless, several financial planners did get up and walk out when she defended the medicine behind ObamaCare.  Has the subject really become something one doesn't discuss in polite company?

Anyway, her point was that the Supreme Court should not "throw the baby out with the bathwater."  I was surprised to learn how much has been done already.  Billions of dollars of work has already been done, and billions more would have to be spent if the Court trashes the entire bill.

She pointed out that, under ObamaCare, insurance companies now have limits on the amount of overhead they can charge.  For example, large insurance policies must spend 85% of dollars on healthcare, with only 15% on overheard.  The industry standard has been 25-30%.  In England and France, it averages only 5%.  Germany's average overhead is 10%.  Interestingly, Germany has the model she likes the best.

In Germany, there is a basic health package that everybody gets and is more oriented toward prevention than treatment.  That part is "socialized."  However, if you want insurance coverage for medical expenses above the basic package, you are free to buy a policy on the open market.  At first blush, that seems to capture the advantages of both systems.  Their annual healthcare costs per person (governmental plus individual costs) is only about one-third as much as ours.

Several times, she railed about the cost of obesity in America, which is estimated at $160 billion every year.  She doesn't think it is a laughing matter, when that money could be used for people who better control their diets.  (FYI -- McDonalds was the best performing stock on the New York Stock Exchange last year.)

She also talked about the waste of end-of-life expenses, pointing out a 3-month stay in ICU by a Medicaid patient costs taxpayers a cool million bucks.  But, don't focus on the Medicaid aspect.  Do you really want to spend a million dollars to keep youself alive and miserable for three months, whether it is paid with taxpayer money, insurance money, and your money?

There was much discussion whether financial planners have a responsibility, to discuss this problem of end-of-life healthcare costs, with their clients.  I expect that will become another "best practice" in the near future.  If so, there will certainly be a form for the clients to sign.

Finally, I have found a real expert, who doesn't have a political ax to swing at the politically incorrect.  I will be reading her blog at -- http://blogs.forbes.com/carolynmcclanahan/ --  and will recommend it to everybody  else as required reading.

The Day After the European Elections

Mainstream economics is similar to mainstream religion.  There is near-universal agreement that long-term sustainable economic growth is the goal.  Also, there are many "denominations" or schools of thoughts about how to achieve that goal.

As discussed here before, there are three mainstream economic denominations in the U.S. today.  The oldest denomination is the Austrian school, which calls for tough love or austerity to reach that goal of sustainable long-term economic growth.  The second denomination is the Keynesian school, which calls for deficit spending to increase demand, thereby jump-starting the economy.  The newest denomination is the Laffer school or Supply-Side, which calls for tax cuts to increase demand, thereby jump-starting the economy.  (Truth-in-blogging requires I confess to being a closet-Austrian economist.)

The elections in France and Greece this weekend highlight the limits of economics.  The Austrian approach of more and more austerity ran into the brick wall of politics.  Increasing austerity is a workable concept in a university classroom of well-fed students, but it doesn't work well with scared voters.  The voters in France and Greece have strongly rejected the pure Austrian approach of austerity.

Asian markets dropped markedly in response to the European elections.  I guess they have not been paying attention, because the European markets were much more sanguine about the elections.  The U.S. markets were also calm.  This is because the elections were already factored into the market.

But, what happens next?  Like politicians everywhere, the new president of France will move to the center to deal with their problems.  Greece, however, is a very different story.  It does not have the ability to borrow anymore.  They can start defaulting and begging for charity . . . or, they can continue on their austerity path and get the agreed-upon assistance from the European Union.

I do sense a certain emotional fatigue to all this, i.e., more people are ready to throw Greece out of the E.U. That would really be bad for Greece.  But, it is such a small part of the Euro-economy.  Greece and Portugal together are only 5% of Euro-GDP.  However, the details of throwing them out of the E.U. is more difficult than most people realize.

Of course, we have long argued that a two-fisted approach of austerity plus growth will be the salvation of Europe.  But, growth doesn't necessarily cost money.  Growth can also be created by removing structural obstacles.  Did you know you cannot fire an employee in France without permission from a judge?  Several nations require prior approval to closing or re-locating a business.  And, don't mess with the labor guilds!

Still, uncertainty has increased, which means the stocks markets will decrease . . . but only for awhile.

Spousal Bucket List

I suppose every married person has a list of things or experiences they want to share with their spouse before they die.  Unfortunately, one of the things on my wife's list was a trip to the Rock-&-Roll Hall of Fame in Cleveland, which we toured Sunday.  Because I care little and know even less about music, it was not time well spent for me.  However, during those agonizing 5 hours, I did learn that the beautiful I.M. Pei structure, housing the impressive museum on the lakefront, was a "public-private partnership."  I then spent the time wondering about such arrangements.

Virginia is a "Dillon-Rule" state, which means ALL power resides with the state legislature in Richmond, except whatever crumbs they delegate to the local areas.  Years ago, when we actually enjoyed forward-thinking legislators, they foresaw the approaching impotency of all things governmental and permitted something called public-private partnerships.  This allows progress to continue, by marginalizing any commitment by government -- but not eliminating it.

An example in my hometown of Virginia Beach is the immensely successful Town Center project.  The City issued bonds to pay for an essential infrastructure project, i.e., the central parking garage.  Of course, this requires a certain amount of debt service each year.  The City then increased the real estate taxes on other properties benefiting from a parking structure in their district.  Taxes were not raised on the rest of the city or its taxpayers.  Only the local property owners paid more in taxes.  That means there was no out-of-pocket cost to the City, as the increased tax revenue easily covered the increased debt service.

Suppose I lease a car for $300 monthly and then re-lease it to you for $400 monthly.  My obligations have increased but my revenue has increased even more.  My recollection is that the City of Virginia is actually making about $2 million yearly on this arrangement.  The trade-off is that the City used a small portion of its  finite capacity to sell bonds, a minor trade indeed.

Frankly, I have been struggling to understand the bitter vitriolic attacks on future public-private partnerships.  At first, I assumed people just didn't understand.  Now, I think some people are opposed to everything; whether it is called waste or progress -- it doesn't matter.  They're opposed to it!

Of course, a more recent public-private partnership to sell a local tunnel and greatly increase the tolls has met with great opposition.  Unfortunately, this has smeared the name of all public-private partnerships.

My wife wonders why some people don't like Rock & Roll music.  I wonder why some people are opposed to public-private partnerships.  Still, I'm glad I crossed-off one of those things from my wife's bucket list.  The bad news is that the next thing on her list is a visit to Kangaroo Island on the southern coast of Australia.  Fortunately, I go nowhere without access to the internet and the cloud.  Therefore, we're not going . . . whew . . . at least, not anytime soon!

Wasting a Perfectly Good Sunrise

This morning, I enjoyed my coffee sitting on our patio, overlooking the dewy 18th green at the famed Firestone Country Club in Akron, Ohio.  But, as I watched a Momma-goose and her five little gooslings waddle across the manicured green, I was thinking about the highest marginal tax rate on Federal income taxes.

There has been much recent discussion that it is time to raise that rate, at least temporarily, to help deal with the terrifying deficit.  One of the most compelling arguments is that we should think longer-term.  After all, the highest rate was 91% in 1955 and is much lower today.  Also, the highest 11% paid 100% of the income taxes in 1940, while the highest 10% pay "only" 70% now.  There has been substantial progress made already.

I'm not arguing that taxes should not rise, but I am arguing that the economic consequence of tax changes should be considered.  According to Supply-side economics, any increase in the highest marginal tax rate creates a significant loss in motivation by the most talented of our citizens.  I do think there is truth to this argument, but the significant loss in motivation is not immediate.  Theoretically, the economy would be improved by the time they act on that loss in motivation.  (It might also induce some high-income workers to retire early, but that opens the door for the frustrated younger workers, who are tired of us gray-haired baby boomers anyway.)

In addition, it is argued that raising the highest marginal income tax rates would decrease the flow of capital into productive purposes, while increasing the flow into government purposes.  Doesn't that assume high income workers are putting money into productive purposes now?  Instead, we see retail investors sitting on too much cash, avoiding the stock market.  With some exceptions, cash sitting idly in bank accounts is not being put to productive use, especially since banks are making relatively few loans, compared to their normal lending practices.

At year-end, the "Bush tax cuts" will expire, and the highest marginal tax rates will return to the Clinton-era levels.  That will be good for the budget deficit and bad for the economy in the short-run but good for our credit rating in the long-run.

Maybe, if the highest marginal tax rate for my Federal taxes goes back up, I'll spend more time watching geese soil a perfect putting surface and less time pondering tax policy . . . but, I doubt it!

The Over-Hyped Monthly Jobs Report

Like drinking from a fire hydrant, investors have trouble consuming economic data.  There is just so much of it. If economists are good for nothing else, they do produce a flood of data.  While there is honest disagreement about which economic report is the most important, it is clear that the investment markets are most quickly affected by the monthly Jobs Report from the Bureau of Labor Statistics.

That report gives us the percentage and number of workers unemployed, the percentage and number of workers under-employed, the number of people joining/leaving the workforce, etc.  The one number that gets the most attention from Wall Street is jobs created by the private sector.  That report is issued on the first Friday of each month . . . tomorrow.

Last month, the market was stunned when it learned only 120 thousand jobs were created in March.  A survey of economists expects the number tomorrow to be about 170 thousand.  If tomorrow's report is below 150 thousand, I expect it will be a cloudy day on Wall Street.  If it is approaches 200 thousand, it will be a sunny day on Wall Street.

It is an unhappy coincidence that the report is issued on Fridays, which also happens to be the most volatile day of the trading week.  Adding to the drama, every Wednesday before the Jobs Report, the huge payroll-processing company of ADP issues their estimate.  This week, they estimated private payrolls increased only 119 thousand, well below economists' expectation and a 7-month low . . . a strong negative hint of Friday's report.

Every Thursday, the Department of Labor releases their new claims for unemployment benefits.  This morning, it was announced that new claims dropped 27 thousand, to the lowest level in the 12-months . . . a positive hint of Friday's report.

As an investment manager, I care a great deal about Friday's Jobs Report.  As an economist, I frankly don't care at all.  First, it is almost always adjusted the following month, as the seasonal adjustments seem to change every season.  Second, it is backward-looking and tells me little about the future.  The trend is much more meaningful.  Third, it may be measuring the wrong things anyway.  There is a closer relationship between job turnover and the future, because workers don't change jobs unless they are very confident of getting another job quickly.

So, no matter what the number is tomorrow -- maintain an existential sense of humor, wear a wry smile, and try to gauge how much the market over-reacts, which is what the market does best.

Have You No Decency . . . Google?

The U.S. Senate held the infamous Army-McCarthy hearings in 1954 for the purpose of finding any communists in the government.  During that process, Senator McCarthy trashed the reputation of many good and decent people.  Finally, one of the lawyers, Joe Welch, could no longer tolerate the abuse and confronted the Senator with "Have you no sense of decency?"

That's the way I think about Google!  Do they have any sense of decency at all?

You may recall a few years ago that Google set out to map every block in America photographically.  It was called "Street View."  They used especially equipped vehicles like this:

Driving to the gym one day, I saw the vehicle mapping my neighborhood and marveled at the technology it must have contained.  Unlike some people, I was not bothered by the fact a person/stalker could know what your house looked like before he got there.

Now, we learn those vehicles may have contained devices that accessed unsecured wifi.  This allowed Google to know such things as whether the residents were writing emails to lovers, looking up personal medical questions, balancing their checkbooks, managing their retirement portfolios, or even their all-important passwords and past browsing history.  Google has assured us that this information was not used.  Doesn't that make you feel better?

Google has apologized, calling it accidental eavesdropping, and alleges it was not illegal.  A 25-page report by the FCC,  released April 13th, agreed.  My first question is why wasn't it illegal?  My second question  is don't ethics matter?

Further investigation into this is obstructed by the fact that the Google engineer in charge of this project has taken the fifth amendment to protect himself.  Emails seem to indicate that at least one senior manager knew about this data-mining of ordinary citizens for two years.  

There are even unconfirmed rumors that Google is working on ways to both see and hear inside homes by use of the webcam and webmic on most home computers.  Would Google actually go that far, to gather information on you for their advertisers?  Why wouldn't they?

In answer to my own question about Google's decency, I expect they have as much decency as you have privacy.

This weekend, a friend sent me an interesting article that Google was so worried about the highly-competitive and highly-stressful working conditions in the company that it was holding a series of "mindfulness stress reduction" classes.

Maybe, they could decrease their stress by increasing their decency?

Ayn Rand Overdose

Readers know I have long been fascinated by the writings and philosophy of Ayn Rand.  They may remember my blog entry on December 5th of last year called "The Little Russian Girl Who Changed America."

This weekend, I have overdosed on her!  First, I watched a DVD entitled "Ayn Rand:  The Prophecy of Atlas Shrugged," which was her landmark book published in 1957. This DVD, however, was a mere puff-piece about how wonderful she was and how great last year's release of the movie Atlas Shrugged was.  Don't bother seeing either!

Then, I read Gary Weiss' excellent new book Ayn Rand Nation:  The Hidden Struggle for America's Soul.  At first, I suspected this book would be an equivalent hatchet-job of Rand, but it is much more.  It really details the Rand infiltration of the Republican Party in general and the Tea Party in particular.  It shows how Rand united both the millionaires and the minimum-wage blue collar workers, the top and the bottom of the income scale, to create a powerful political force.  Weiss does not attack Rand and seems to marvel at the extent of her influence, as I do.  He also laments the fact that much of her philosophy is misunderstood and too often used for pure political purpose.  He even quotes famed film director Oliver Stone, who characterized Ayn Rand as an essayist disguised as a novelist of books which were over-shadowed by her politics.  This book is absolutely required reading for any serious student of contemporary Rand influence.

Lastly, I read the tightly-written but important Why Ayn Rand Is Wrong and Why It Matters by Levi Asher.  It was fortunate that I read it last, as it is deftly ties the dangling inconsistencies together.  In it, Asher goes for the Achilles heel of Rand's philosophy and severs it with almost surgical precision.  One of Rand's most controversial beliefs was her belief in the importance of self-interest, while routinely condemning altruism.  (For those of us raised in the Christian faith, any condemnation of altruism is hard to understand.)  Asher explains that there is the individual or atomic self, which fights for the interests of an individual.  But, there is also the collective or molecular self, which fights for the interests of groups of individuals.  The example of soldiers marching resolutely into a horrible battle and their probable death is an example of molecular self-interest.

Protagonists in Rand's stories invariably stand alone against government, but is it possible the government might also be fighting for the collective interests of many people?  Not according to the Randians!

Fighting for the interests of the Republican party or Tea Party would be another example of the molecular self-interest and would be lauded by most of the Rand disciples, who are blind to the inconsistency of political parties and atomic self-interest.  But, I have never seen Rand as supportive of any partisan politics.  From the first time I read Fountainhead, I believed Rand glorifies the person who fights against over-whelming odds; those people who prefer outright defeat to a passive surrender.  Rand was about freedom from power, not the acquisition of power, which is the sole concern of political parties.  Besides, she was one of those consummate intellectuals, which no political party wants.

I have clearly overdosed on Rand this weekend.  My wife even wants to enroll me in a twelve-step program to kick the Rand habit.  I may have a Rand hangover today, but I'll feel better tomorrow!



  

Mother's Milk

Investment analysts from the Warren Buffet school of investing often say that corporate earnings are "the Mother's Milk of stock markets."  If true, the babies must be getting fat and healthy.

In the 2008 crash, corporate earnings for the S&P 500 dropped a staggering 92%.  But, take a look at this chart:

Corporate earnings have rebounded just as sharply as they fell.  In a mere 34 months, corporate earnings have recovered  to a level that took 67 years to to reach.  We are almost back to pre-crash levels!

This supports my belief that the U.S. economy is recovering.  Every quarter, analysts predict the rate of growth has got to slow, as we approach pre-crash levels of earnings and resume a normal growth rate.  Yet, a whopping 75% of earnings reports so far have beat lowered expectations.

Now, if we could just fix Europe . . . please!

Growth Blues

During the fourth quarter of last year, our economy expanded at a 3% rate, and there was a collective sigh of relief.  We knew there was a slowdown during the first quarter.  A survey of economists expected the GDP growth rate for the first quarter would be only 2.5%, which is not great but certainly acceptable.  Unfortunately, it only increased 2.2%.

It would have been worse except consumer spending was up strong at 2.9%, compared to only 1.9% in the fourth quarter.  This would be great, if consumers were making enough money to afford increased spending.  Unfortunately, consumer savings decreased, another testimony to the seductive power of advertising to make consumers do things that are harmful to themselves.

The all-important level of business spending, which was up 5.2% in the fourth quarter, actually fell by 2.1% in the first quarter.

Defense spending also decreased, which hurt our GDP growth rate.  I don't understand this number and will study it more.  However, it does give a quick idea of what happens to our economy if sequestration happens next year.

This slowdown was confirmed by the decrease in durable goods orders on Wednesday and the slowing employment gains on Thursday.

So, is our economic recovery derailed?  No, not yet.  Slowdowns are commonplace.

Could it be derailed?  Absolutely, but I don't think it is likely, unless there is a real financial collapse in Europe, not an economic collapse, but a financial one.

Remember:  the "new normal" is a long, slow run toward recovery, unless we have a "Jim Fixx" moment, which is most likely to come from Europe . . . or Congress.

The Smell in Nursing Homes . . . Trouble

You heard it here first -- something stinks in the long-term-care insurance industry!

Long-term-care insurance provides funds for some of the expenses related to nursing home care and other end-of-life expenses.  Insurance companies saw the massive baby-boomer generation headed into their golden years and smelled an opportunity to sell insurance.

A brilliant marketing move by them to sell insurance was to argue convincingly that financial planners were negligent in their jobs, if they did not counsel their clients about the cost of nursing homes and dying.  Recently, it was announced that a new "best practice" for financial planners is to have each client sign a letter that they did not care about nor want to hear about long-term-care expenses, in order to protect the financial planner from the children of the client.  (My clients can expect such a letter in the near future.)

At the same time, many of the major insurance companies, such as Prudential, are leaving the long-term-care market, because they cannot make a profit, no matter how much they raise their premiums each year.  A sure sign of trouble, I've heard of large premium increases from such giants like John Hancock, some as much as 90%, which would be staggering to most people.  The insurers of long-term-care expenses are getting fewer and fewer.  That means the risk of covering more people is becoming more concentrated in fewer companies.

Now, consider what happens to most people as they age, i.e., their income usually drops while their premiums keep rising.  At some point, they cannot pay the premiums any longer and must drop their insurance.  At that point, they are probably no longer insurable, due to normal aging-related health problems.  So, they have paid premiums for years and no longer have any coverage, not even the money already spent on premiums.  Instead of reducing risk for the elderly, it has increased their risk if they cannot keep paying premiums, whose annual premium increases are unknown.

Imagine if a dominant company like Genworth, who is the largest, gets into financial trouble.  Fighting for survival, they raise premiums drastically, causing many policyholders to drop their coverage, and delaying payments to nursing homes, increasing the financial stress of the nursing home operators.  It will be a stinking mess, and it will get lots of press coverage.  Seeing grandma thrown out of the nursing home sells lots of newspapers.

Will the government allow this problem to get out-of-hand?  My pension check from SunTrust Bank is guaranteed by the Pension Guaranty Benefit Corporation of the Federal government, as are most pension checks.  Will the government then step into the role of long-term-care insurance provider . . . or will it let all those elderly voters lose their coverage?  Which alternative stinks the least?

The good news is that it will give liberals and conservatives another reason to paralyze the government, like they really need one. 

Parsing the French Election

Unfortunately, Sarkozy came in second in Sunday's nationwide election.  This means he will face a run-off election with Socialist candidate Francois Hollande in two weeks.

Sarkozy has been instrumental in the effort to impose fiscal discipline on Europe.  Unfortunately, he was also caught in the undertow of the European crisis.  Despite being a conservative, the debt-to-GDP ratio for France has risen from 67% to 90% during his administration.  Even more damning, Sarkozy promised originally to reduce unemployment to 5%, but it has risen to 10%, which is a 13-year high.

He was attacked for pushing austerity instead of growth by the Socialist Hollande.  As mentioned numerous times in this blog, it takes both austerity AND growth (including the U.S.).  Because austerity is termed in fewer dollars or Euros per spending line on a budget, we think of growth the same way.  Typically, Hollande promised more spending to boost growth.

Spending WILL boost growth, provided you can afford to borrow enough, which neither France nor the U.S. can afford to do.  That is not an option in this economic environment.

Growth can be produced by making it easy to grow, i.e., by reducing regulatory handcuffs.  We complain about it in the U.S., but look silly compared to the Europeans.  As an example, an employer has to get permission from a judge to fire an employee in France, which understandably makes an employer reluctant to hire anyone.  In Greece, you cannot close a store without government permission.  In Italy, the rider faces a fine for riding in an improperly licensed taxi.  There are thousands of other examples.

There is no line on the budget that shows the cost of over-regulation.  If we insist on thinking in terms of budgets, how about a rule that every agency must reduce their number of regulations by 1% per month every month?

Conservatives think almost any regulation is unnecessary as business would find it unprofitable to do something stupid and are therefore "self-regulating."  Liberals think only regulation can keep poison out of the water and grandma safe at home.  Maybe, we just need 1% more moderates per month every month?

Old History, Old Memories, and Economics

Last night, I found myself watching The History Channel, which is normally excellent.  However, I was watching a show on the predictions of Nostradamus, a 16th century Frenchman who was trained as a pharmacist.  Everybody has heard of his prediction, based on Mayan lore, that the world will end 12-21-2012 or in about eight months from now.

Long ago, when I lived in Texas, I became very interested in pre-Columbia art and culture.  I learned the Maya  believed in several cycles of time and expected the world to end when all the different cycles of time ended together.  Yes, you guessed it!  That will be 12-21-2012.

However, after all these years spent studying economics, the world poses more questions than alarm.  For example . . .

1.  If Nostradamus was right, why did he speak so obliquely?  He must have been the worst writer in France during the 16th century.  And, why did God pick some insignficant pharmacist to reveal his divine plan?  Were there no worthy clergymen?  Don't even tell me that God is French!  Also, does God think some combination of 1s and 2s is interesting?  Why wasn't 2-12-1012 good enough?  And, what did Nostradamus expect us to do with his prediction anyway?

2.  Assuming the Mayan calendar is right, why does the mathematical coincidence of different time cycles ending have any meaning anyway.  Such numbers have no significance.  And, why would God give such information to the Maya?  Didn't he like the Egyptians or Hebrews or anybody else just as much as the Maya?  And, what did the Maya expect us to do with their prediction as well?

3.  Should everybody stop producing goods and services, since we're all going to die this year anyway?  Or, should we just spend a lot of money on stories, books, and T-shirts heralding our untimely demise?  Is the time spent wondering about all this "end-of-the-world" angst very productive, since it is out of our control anyway?

Free Enterprise is a wonderful system, even if it does supply end-of-the-world predictions to meet the demand for such predictions.  It is just like the production of horror movies.  In both cases, a demand is being satisfied for a profit, but neither is real.

Time for Lift-Off ??

There has been a good deal of discussion about the slowness or the weakness of this recovery.  My analysis is that recoveries from financial collapse take longer than a normal garden-variety recession, because it takes so long to de-leverage or reduce debt levels.  But, here is another take on the slowness of this recovery.

If we define a "massive bear market" as one where an index declines by 50% or more, there have been four of them since 1896.  Three measure the Dow, and one measures the Nasdaq.  If you look at this chart, you can see that all four recoveries have been slow or weak for the first 800 days.

The strongest of the four recoveries was in 1932, following a financial collapse, but not particularly strong during the first 800 days, when a strong bullish rally began.  If we were to follow the same course, it would be time to start now!

My take is that all this is merely coincidental, although interesting.  Following the financial collapse of 1929, the government had the ability to take a Keynesian approach or borrow heavily to spend.  The government does not have that luxury now.  Therefore, I don't expect such a strong bull rally now.  We have already used our "dry powder" paying entitlements and funding wars, which prevents us from dealing with the  present collapse by using a Keynesian approach.  That only leaves us with the Austrian approach to cut spending and raise taxes.  This does not quicken the recovery, but it makes the recovery more strong and sustainable.  

As discussed in this blog before, increasing corporate income taxes would not help the economy as much as increasing personal income taxes.  Corporate tax rates are much higher in the U.S. than any other developed nation and should actually be cut.

For those armchair economists who wonder why not take the Supply-Side or Laffer approach of cutting both spending and taxes now, we have found that approach works best when the economy just needs to be "jump-started" instead of fundamentally "fixed."  And, does anybody think our country doesn't need to be "fixed?"  

There will be time to jump-start the economy later.  We need to fix it now.

"Sell in May and Go Away"

That is an old adage from the Wall Street days before air-conditioning, when New York was insufferably hot during the summer, and the Robber Barons who controlled the trading spent the summer on the shore.

Indeed, for the last two years and three of the last four years, the market reached its high in May and then drifted down the rest of the year.  Just like the last two years and right on cue for this year, Europe is again raising worries.  Further evidence of a pending decline is said to be the current "choppiness" in the market.

But, I don't think it will happen this year.  Yes, the market is very choppy now, but that is normal in a bull market, when we take "two-steps-forward-and-one-step back."  In addition, the problem in Europe is different now.  A template has been created.  Austerity programs have started in several countries already.  The hook has been set.  Focus has now shifted from austerity to growth.  The ECB kicked the can down the road with its $1.3 trillion LTRO program, and it is now time to kick the can again.  The IMF is raising new funds easier than expected.  Of course, the pain will get worse for the people, and there will still be much screaming and shouting, but Germany is already committed, even if they don't want to admit it.

That doesn't mean Europe cannot hurt the world.  A major banking failure there could easily create a major derivative problem here.  It bears watching closely!

Of course, in 2012, you can closely watch the European credit crisis . . . even when you're sitting on the shore.

A Good Life Deserves a Good Death

A few nights ago, we watched the new movie Iron Lady about Margaret Thatcher.  I expected an inspiring story about the rise of a grocer's daughter to become the first female prime minister of England.  Instead, it was a touching study of dementia, i.e., that slow descent into madness before death.  Hearing others talk about things she didn't understand, her fears rose.  Seeing others talk among themselves, her paranoia rose.  After a lifetime of accomplishment, she deserves a better final chapter than being a bitter old lady.

The next day, I attended the funeral for a friend.  While we met in Rotary, we became friends when I met the bronzed, 83-year-old walking on the beach so often.  A lifelong resident of this area, he began as a phys-ed teacher and rose to become the first director of parks for the city.  He was in great health until the last year of his life.  Toward the end, I thought he may have been somewhat fearful, but he was never angry or bitter.  He was always a happy person, even in his final chapter.

I've been thinking about the contrast.  Lincoln once answered that a man's legs should be long enough to reach the ground.  Will Rogers said a person can be about as happy as they want to be.  But, that begs the question of who doesn't want to be happy?

Maybe, it is just a matter of priorities.  Lady Thatcher was driven by ambition.  Did that trump her desire to be happy?  Or, does dementia make such priorities irrelevant?  Is her lifetime of accomplishment erased by the sadness of her death?

Existentialists have long considered death to be the ultimate absurdity.  Often, I've heard death spoken in terms of rest after a lifetime of toil.  Or, death may be a reward or the punishment for a life lived correctly or incorrectly.  No matter whether death has meaning or not, the slow-motion death of dementia is worse than a sudden death.  (Speaking as an economist, it is also much less expensive.)

To Lady Thatcher, whom I love and respect, I wish her a good death.  She has earned it!  And, to my beach buddy, I congratulate him on both a good life and a good death.

Fairness Is In the Eye of the Beholder

Living in America, any discussion of taxes and fairness seems to revolve around high and low income earners, i.e., rich vs poor in terms of income.  In Europe, that discussion tends to revolve around high and low net worth statements, i.e., rich vs. poor in terms of asset amounts.

However, I think England and Canada may have the proper framework for the discussion.  They see it in generational terms.  Is it fair to tax our grandchildren for our current entitlements?

While I doubt anybody would seriously think that such an approach to tax our grandchildren would be fair, one must then determine the all-important details of who pays how much and when.  But, there is still a difference.  It energizes the young people.  They have an understandable interest in the discussion.  It is no longer another boring subject that old people discuss endlessly.

History shows that it is mostly young people who take to the street rioting, and that may be just the extra push we need to break the current political paralysis in Congress.  Nothing seems to be working right now.  If that is what it takes for Congress to do their job of protecting future generations from us old people now, than I look forward to watching our kids and especially our grand-kids on television . . . don't you miss the 1960's just a little bit anyway??

Column Time

For those few folks who do not subscribe to Inside Business, my latest quarterly column can be found here:

http://insidebiz.com/news/great-first-quarter-lousy-recovery 

I don't know why the online version never looks as good as the print version, but that is just another reason to subscribe.

Friday Night at the Flinchums

Sometime ago, I bought a DVD on the PBS website called "The Crash of 1929" and watched it last night.  (I really do have to get a life!  That's no way to spend a Friday night, according to my wife.)

Despite the ever-present fear that "it could happen again," there are at least three differences that make a repeat of the 1929 crash very unlikely.  First, there was a lot of borrowed money in the market in 1929, when you only had to put up 10% of the purchase price, compared to 50% now.  In other words, in 1929, you could borrow $90 to make a $100 investment then, but you can only borrow $50 now.  That's called "leverage," which helps you when the market goes up but kills you when the market goes down.

Second, the average investor was playing the game or exposed to the stock market in 1929.  However, following the mini-crash of 2008, many people are still too afraid to go back into the market.  They are known on Wall Street as the "dumb money."  There is also much discussion on Wall Street about the anemic level of volume in shares traded.  Those broker-dealer firms depend on volume to make money, and people are simply sitting out the rally, immobilized by fear.  So are businesses!  The biggest players today are hedge funds and mutual funds, aka the "smart money".

Third, a lot of the "frothiness" of 1929 was the result of actions that are flatly illegal today.  An example would be the classic "pump & dump," whereby a group of wealthy investors would join forces to bid up the price of a stock until the average investor noticed the run-up in price and starting buying the stock, at which time the wealthy investors would sell their stock, which then plummeted in price, cheating the average investor.  Despite greater legal protection for average investors today, they are still too fearful to return.

The only spooky similarity between 1929 and the present was the discussion about "the new era," referring to the eight years of economic prosperity that preceded the crash of 1929.  (There was even a signature song about "blue skies are all I see.")  That relentlessly, sunny, overly-optimistic outlook certainly does not exist today.  However, I can remember Ben Bernanke in 2007 arguing there is a "great moderation" wherein the economy was now administered so well that booms and busts were no longer possible.  And, he is a very serious student of the Great Depression!

It is clear we cannot have another crash like that of 1929 . . . from the same causes anyway.  It is also clear to me  that we could still have a crash of similar devastation but from different causes.  I worry about the "dark pools" of money, where virtually nothing is known about the investors, their techniques, or their investment objectives. I worry about the un-regulated derivatives market, which prevents transparency for a reason.  I worry about the absolutely soul-crushing reliance on technology and the ever-increasingly complex nature of investing.  (Think Flash Crash.)  And, I even still worry a little about the sovereign funds, which could use their vast wealth for political purposes.  (Think Mutually-Assured-Destruction or MAD.)

Last night, I got a reminder of how it is more important than ever to have a "Sell Discipline" or a pre-determined signal of when to start increasing cash . . . but, that was just before my wife reminded me I should be taking her out for dinner instead.  After all, it was Friday night!

The Wisdom of the Market ?

Last night, I toyed with writing a blog that said the market would open today -- up or down -- depending on four things that would occur before the opening.  On Thursday night, Google would announce its earnings and China would announce its GDP growth rate for the first quarter.  This morning, both JP Morgan and Wells Fargo would also announce their earnings.

All three earnings reports were positive surprises.  All three beat both gross revenue and net income expectations.  However, China's GDP growth was "only" 8.1% instead of the 8.3% that was expected, and Dow futures now indicate it will lose 50 points at the open.

Apparently, China's growth rate means more than the U.S. earnings . . . I don't think so!

You can't believe everything the market tells you, at least in the short-run.

Here We Go Again . . . ??

For the third year in a row, the rites of Spring include a European panic attack.  Today, it became clear that Spain is going down the same trail as Greece.  While their interest rates have not reached earlier highs, the spread between their rates and the rates of Germany have reached a record high.  The message is that investors   prefer the relative safety of  Germany, even with much lower interest income than they could get buying Spanish bonds.  This is ominous.

Today, the Dow lost 213 points, only the second time this year the Dow has dropped as much.  That makes five days in a row the Dow was down.

In fairness, there were other things spooking the market as well.  For example, the all-important but lousy Jobs Report was released on Friday, when the U.S. stock market was closed.  When we opened yesterday, our market reacted to it by losing 130 points.  As is normal, Europe has more holidays than the U.S. and didn't open until today.  So, it had to factor in the lousy Jobs Report PLUS the blowout in German-Spanish bond yields . . . two big chunks of bad news in one day.

The fear is that the bear market during the last two summers will be repeated -- only much worse because Spain's economy is much larger than Greece's.  I am a bit more sanguine about that fear.  There is real value in having a template ready-to-go!  Europe knows what it had to do for Greece and must now do it again, only bigger.  Everything depends on the ability of German leaders to calm the angry German voters.

In addition, we shouldn't under-estimate the commitment of Fed Head Bernanke.  When Europe got into trouble, he entered into an unlimited currency swap arrangement with the European Central Bank to supply all the dollars Europe needed.  Almost unnoticed is that the arrangement was two-way, which means our Fed could step into the place of the ECB temporarily if necessary.  While politicians in this country will howl loudly and vociferously, I don't think Bernanke will be swayed from his commitment to prevent collapse, even if he has to save Europe.

The point is -- we have tools available that we did not have last year!

Lastly, we are entering "earnings season" when corporations must confess their performance for the last quarter or the last year.  One of the reasons the market has stalled is that analysts have cut their earnings forecasts.

The first company to release results is Alcoa (AA), which they just did, easily beating analysts' expectations for both revenue and earnings per share.  Because aluminum is closely tied to growth, I expect that news to put some lift into the market tomorrow, not enough to overcome more bad news out of Europe but enough to absorb some of it.

Don't you miss being young . . . when a young man's attention turned to affairs of the heart each Springtime, instead of international stock markets?

A Beach Boy, Golf, and a Real Marathon

Maybe it is because this is the weekend of the most hallowed of golf tournaments in Augusta or maybe it is because I met the author at dinner Thursday night at the Town Point Club in downtown Norfolk, but I actually read a book on golf today.  It is titled King of Clubs:  The Great Golf Marathon of 1938 by Jim Ducibella, the long-time sports editor of The Virginian-Pilot and current resident of Williamsburg.

It is a true story about a young couple from the Alanton area of Virginia Beach, who went to Chicago, where he worked as a stockbroker and was a member of a prestigious country club, called Olympia Fields (which I am certain is not as good as the Cavalier Golf & Yacht Club, which he should have joined and stayed in Virginia Beach).

His name was Smitty Ferebee, and he had a handicap of 15, which is good but certainly not great.  However, he did have incredible endurance . . . and a sucker's face for a bet.  Against his wife's wishes, he bet his family's 296 acres of land on Broad Bay in Virginia Beach that he could play 33 rounds of golf in 96 hours, starting in California, before going to Phoenix, Kansas City, Chicago, Philadelphia, and New York without any round having a score over 100.

While Trane Air-Conditioning provided the plane, Ferebee still had to walk 182 miles on foot (no golf carts) and lost 21pounds  in four very long days.  Despite his caddie saying the blisters on Ferebee's feet had their own blisters, despite many weather-related problems, and despite being "slipped a mickey" by a bookie in Philadelphia who wanted Ferebee to fail, he eventually overcame it all and won the bet.

The fictional story of Rocky Balboa was no more heroic than this true story!

Then, it got even more strange.  When World War II broke out, he wanted to become a pilot but was too young.  Of course, he overcame all opposition and succeeded in becoming the Navy's oldest pilot, eventually meeting the Navy's youngest pilot, a certain George H.W. Bush.

He also wanted to experience what it was like to be a paratrooper.  (I could have told him that!)  Under strict orders not to jump out of any airplane, he instructed a junior pilot to fly an old open-cockpit two-seater and to turn it upside down.  Since he was not belted-in, he fell out of the plane from 2,000 feet, deploying his parachute and breaking several bones upon landing.

In 1945, his plane crashed while dropping supplies to American POWs north of Tokyo.  Although his co-pilot died, Ferebee was lucky -- with only 13 breaks in his left arm, a fractured skull, and a hemorrhaged left eye. While he only re-gained 35% usage of his arm, he resumed playing golf after the war.

Moving to the Richmond area in 1950, he joined the Hermitage Country Club and still won the Virginia Sate Senior Amateur Championship in 1962, despite his war injuries.  He worked for the Equitable Life Assurance Society before retiring in 1970.  After dying of cancer in 1988, he was buried on the old family property in the Alanton area of Virginia Beach, where his wife joined him nine years later.

For those of you like myself, who enjoy a good non-fictional story that is both well-researched and well-written, I recommend this book.  For me, I enjoyed the book until I realized that his average score over the 33 rounds was 85 . . . an unattainable goal for a duffer like myself.  I couldn't shoot an 85 on one round, much less average that over 33 rounds in 4 days.

Maybe . . . I'm just jealous?  But, I'm not going to read it again!

Borrowing Jobs

Congress is very good at one thing, i.e., borrowing from the future.  Apparently, so does the weather!

The Department of Labor released their monthly Jobs Report this morning, and it was disappointing.  Most expectations were that the economy created about 200 thousand jobs in March, down from about 240 thousand in February.  Instead, only 120 thousand jobs were created, the smallest gains in five months.  That's bad news!

Some decrease from February was expected, because the winter has been so mild that outdoor workers were hired earlier than usual this year.  Nice weather in January and February borrowed jobs from March and probably April too.

However, the unemployment rate dropped from 8.3% to 8.2%, which is good news.  Unfortunately, the workforce decreased 164 thousand jobs, which is bad news.

The combination of un-employed and under-employed dropped dramatically from 14.9% to 14.5%, which is very good news but more explanation is needed.

My gut tells me this month's report will be substantially revised next month.  Some figures don't make sense to me.  For example, retail jobs decreased at the same time as retail sales increased.  Also, health care jobs dropped sharply, which is very unusual.  Lastly, did the weather really borrow 80 thousand jobs from March and April?

While I don't think the fat lady has sung on this report yet, the market certainly did.  Dow futures were up about 25 points before the report and were down about 140 points right afterwards.  Plus, interest rates dropped significantly, as investors fled stocks for the "safety" of government bonds.

The stock market is closed today, but I expect it will fall sharply first thing Monday morning.

Have a nice Easter weekend anyway!  You've seen worse news than this . . . 

Irrational Markets or Irrational Investors?

The conventional wisdom among economists is that capitalism is rational, because people act in their own best interest.  However, among investors, there is an old adage that the stock market can be irrational and stay irrational longer than you can stay solvent.  The market was irrational yesterday and today.

In the short run, the stock market is a contest between expectations and results.  The expectation of Wall Street was that the Fed would, sooner or later, have to begin another round of quantitative easing (QE) to jump-start the slow economic recovery.  It is also good for the stock market, because it drives down borrowing costs and drives up liquidity which usually finds its way into the stock market.

Yesterday, minutes of the last Federal Open Market Committee (FOMC) were released.  It showed scant discussion of any future QE.  In other words, Wall Street was disappointed and sold off.

But, here is the irrational part.  The FOMC thinks the economy is doing well enough that it doesn't need any  additional jump-starting.  So, the stock market sold off because the underlying economy is doing better than expected -- huh??  Because expectations were not met, the market went down -- in the short run.

In the long run, the stock market has a closer relationship to the economy.  The FOMC minutes were bad for the market in the short run but good for the market in the long run.

I expect the disappointed market will swoon for awhile, waiting the economy to catch up somewhat, before resuming its bull run.

Now, try explaining that to your grandmother . . . she's probably more rational than the stock market in the short run, even if not in the long run.

Gallows Humor

For those readers old enough to remember privacy, you might just need something to smile about, and I'd recommend you click on or copy/paste this link:

http://online.wsj.com/article/SB10001424052702303816504577309562257097438.html?KEYWORDS=eric+hague    

It is a humorous column written by Eric Hague about Google's relentless pursuit of every piece of personal information about you.

By the way, I no longer search the internet with Google and highly recommend you use www.bing.com whenever you need to search.

The 1% of the 1% of the . . .

The most enduring contribution of the almost memorable Occupy Wall Street movement to the American lexicon is . . . the notion of the 1% vs. the 99%.  You know --  that is the notion that 99% of Americans suffer because the 1% has all the wealth and repress the poor 99%.

Now, suppose you have worked hard, as well as been lucky, and you are now a member of the 1%.  That means, according to Kiplinger, you have income of about $400 thousand yearly.  This is about six times the $68 thousand average pay of the 99%.  You did well!  You are now one of the top 1.5 million Americans!

Now, suppose you look at the rest of your new peer group, i.e., the 1%.  You'll find it is even more stratified than the great, unwashed 99% that you just escaped.

The average pay of the top 1% of the 1% is $23 million yearly, which is over fifty times more than you make each year.  In other words, you make six times as much as the average American but only 2% of what the top of your peer group makes.

You can object to the unfairness of the "system" that they make 50 times what you make.  You could advocate for greater taxes on them.

Or, you could curse your bad luck and resign yourself to permanent "victim-hood."

Or, you could just count your blessings and go help somebody that needs you . . .