Worldwide Nuggets

Ruchir Sharma is a high-powered, globe-trotting executive with Morgan Stanley, in charge of Emerging Market Equities and Global Macro.  I just finished his new book, Breakout Nations:  In Pursuit of the Next Economic Miracles.

He points out that China, Russia, and India are yesterday's news and showing all the familiar signs of slowing.  The future lies with such nations as Mexico, Indonesia, Turkey and Korea, and he makes a convincing case for each.  Surprisingly, he also foresees two countries of Eastern Europe as real growth prospects, i.e., Poland and the Czech Republic.

While it was worth my time reading it, I would not recommend it to others.  Despite a pleasant writing style full of interesting anecdotes, the book lacks organization and statistical detail.  It is more of a travelogue by an investment manager, writing about what he did during his summer vacation.

Still, there were some great nuggets, that are worth repeating. such as:

India has more in common with Brazil than it does with China, as both India & Brazil are "high-context" societies that are family-oriented, "colorful, noisy, quick to make promises that can always be relied on."

China pursues "growth at any cost," while Brazil pursues "stability at any cost."  (I disagree with his conclusion on this.)

China may have embraced capitalism, but they have not embraced the bottom-line discipline.

"Supporting a welfare state is a rich man's disease."

A problem for breakout nations is the "trilemma" of managing exchange rates, interest rates, and the flow of foreign money in/out of the country.  (Amen!)

"CNBC Culture" is the obsession with the normal zigs & zags of the market and should be avoided.

Ten families in Mexico own one-third of their stock market, which is dangerous.

The richest man in India has a 27-story home with 400,000 square feet.

The Cambodian stock market opened i n July of last year and still doesn't have a single company listed on it.

The belief that commodity prices will continue to rise as the traditional BRIC nations continue to grow is as dangerous as the technology bubble.

My take is that it is imprudent for a U.S. based investment manager to take a bet on any particular company in some remote part of the world.  That's an ideal example of where mutual funds make sense for the average investor. 

Thelma & Louise

In that 1991 movie classic, two women choose certain death driving over a cliff rather than continue living in grinding disappointment.  At year-end, our country faces a similar decision.

Remember:  good economic policy requires both monetary policy AND fiscal policy.  Monetary policy is controlled by the Federal Reserve, which can make decisions much more easily than Congress, which controls fiscal policy.  The inability of Congress to compromise and control fiscal policy is driving the country over the cliff.

It is hard to think about the fiscal cliff without first thinking about the election.  If either party makes a clean sweep of the White House and Congress, then we might avoid the cliff.  If not, we will have continued gridlock and certainly go over the cliff, assuming the Republican Party remains a hostage of the Tea Party.

If we go over the cliff, I see three scenarios.  First, there is the pessimistic scenario of a 5-6% recession, not as bad as the last one but still quite bad.  Of course, the longer Congress refuses to compromise, the worse the recession will be.

Second, there is the cynical scenario.  Because the Bush tax cuts automatically expire at year-end, the Democrats may act to extend all those cuts, except those for "wealthy" taxpayers.  The remaining tax cut in 2013-dollars would be larger than the original Bush tax cuts in 2001 and 2003.  This would allow Republicans to vote for the Democratic proposal, the largest tax cut in history, without violating their blood oath to Lord Grover Norquist, who used to be a comedian, by the way.  This action could be done in days, avoiding a recession.

Then, there is the optimistic scenario.  We have become so cynical that we only expect the worst.  What if Congress actually re-structured our fiscal policy; raising taxes some and cutting entitlements a lot?  Our economy would boom!  Unemployment would drop slowly at first but then improve more quickly.

Just twelve years ago, we were running budget surpluses, paying down the national debt, and employment was high.  If we have fallen so far in such a short time, we can still fight our way back.  To steal a campaign slogan . . . Yes, we can!

While I have my preferences about who should win the election, I think it is more important that the election be decisive, with one party making a clean sweep.  While I have always admired the two-party system over the parliamentary system with many parties, the two-party system is useless when there is no compromise.  While I believe a one-party system is bad for America in the long-run, what is the alternative in the short-run, except more gridlock?

I hope we don't experience the feelings of Thelma & Louise as the canyon floor raced toward them!

An Apology Tour

Yesterday was a long day, rising at 2AM and going back to bed at 1AM this morning.  During that 23-hour day, I caught four different airplanes . . . and heard 19 different apologies from the airlines.  By the end of the day, I was thinking about the purpose of apologies.  Here are the definitions:

1. 
a written or spoken expression of one's regret, remorse, or sorrow for having insulted, failed, injured, or wronged another: He demanded an apology from me for calling him a crook. 

2. 
a defense, excuse, or justification in speech or writing, as for a cause or doctrine. 

3. 
( initial capital letter, italics ) a dialogue by Plato, centering on Socrates' defense before the tribunal that condemned him to death. 

4. 
an inferior specimen or substitute; makeshift: The tramp wore a sad apology for a hat. 

Four of the apologies were for late departures.  Three were for late arrivals.  Two were for not providing drink cart service.  Two were for cutting the lights out and so on . . . One apology was for construction on a storefront concessionary in the hallway as we deplaned.

I think there is another definition of apology:  "I've already used the word apology or sorry.  Therefore, don't waste my time complaining about something I don't even care about!"

In other words, it is just a tool to maximize time effectiveness.  If you think that is just a cynical view of a nice gesture, I apologize . . .

Comprehending the Incomprehensible

Despite my best efforts to consume mass quantities of information, there are many things beyond my comprehension.  For example, I don't understand why whole nations would riot, even killing people, over some tasteless movie trailer in the U.S. or some cartoons in Denmark.  It just lies outside my realm of comprehension.

Likewise, I don't understand why it is "cute" to watch kids put unhealthy stuff into their mouths, like candy.

But, right now, I'm trying to understand why the Securities & Exchange Commission (SEC) has punted on the "fiduciary duty" of financial advisors?

I have a fiduciary responsibility to my clients, which means I have to always put their interests first.  That doesn't mean I will never make a bad investment.  But, it does mean I will never hide any fees.  It means I will never make any investment that pays me hidden fees or kickbacks.  It means I will never buy bonds in my own account and then sell the bond to clients at a higher price, which is called a "mark-up."  It does mean I will always be honest with them, not just technically honest but holistically honest.  All members of the National Association of Personal Financial Advisors are held to this fiduciary standard.

Stockbrokers are not!

When it was suggested that all financial advisors, including stockbrokers, be subject to the fiduciary standard, the brokerage houses had an unvarnished, old-fashioned "hissy-fit."  I'm embarrassed that the two Republican Commissioners kept insisting on "more study, more study," effectively killing the fiduciary requirement for stockbrokers.  Accepting the fiduciary standard would have been so much better for the investing public.  Indeed, the SEC Chairman, Mary Schapiro, said "I still think this is a really important thing for the SEC to do for investors."

I just don't understand why stockbrokers don't want to put their clients first?

Maybe, I should just mind my own business and try to comprehend something truly incomprehensible, like why my wife needs so many shoes?  After all, who really needs 13 pair of black heels?  Can anybody comprehend that??

Obama Wins . . . ??

The popular wisdom on Wall Street is that is the stock market can usually see six months or so down-the-road.  Historically, when the market goes up, the economy usually follows.  However, is it able to predict the election outcome?

The analysts at LPL Financial just completed an interesting analysis.  They divided the sectors of the economy that do well under Democrats and those that do well under Republicans.

The sectors that do well under Democrats are:  Health care, food & staples retailing, gas utilities, health care service, life sciences tool & services, construction materials, homebuilding and construction, and farm machinery.

The sectors that do well under Republicans are:  Coal, diversified financial services, oil & gas explorations, oil & gas drilling, managed care, electric utilities, specialty retail, and telecommunications.

So, which group of sectors have been performing the best over the six months before the election?  Drumroll, please . . . the Democrats.

I'll spare you the detailed numbers, but it also looks like the Democratic sectors are winning easily.  Investors are putting their money where they think it will do best, which means they think the Democratic administration will remain in place.

Wall Street seems remarkably sanguine about this.  Maybe, they realize that the stock market has performed better during Obama's presidency than any other president . . . ever.  (Of course, timing is everything.  He took office in January of 2009, and the market hit bottom in March of 2009.)  Still, he does have the bragging rights, and maybe that is all that matters on Wall Street?

Fiddle Faster, Nero !!

The Finance Ministers of Europe had a meeting last weekend to deal with (1) the bailout of  Spain's government, (2) a two-year extension for Greece, and (3) a common banking system for Europe.  The result of all that brain power was nothing, saying they were in "no rush."  After all, they have been in a crisis for three years, and the world is still alive.

My first thought is that they are irresponsible to delay resolution of this thorny, long-running problem.  However, from their perspective, they have already made a great deal of progress.  Everybody knows that a tighter political unification is essential, but as politicians, they know they cannot get too far ahead of their voters, who are largely opposed to political unification.  Besides, Angela Merkel said she is confident they have the crisis under control.

The Finance Ministers point to what they have accomplished during this three-year crisis.  They have created the EFSF (European Financial Stability Fund), the ESM (European Stability Mechanism), avoided "Grexit" or the disorderly exit of Greece from the Eurozone, and began the process of quantitative easing.  Give them credit for having accomplished that much!

Along the way, Greece is nearly in a depression.  Spain is heading that way, and God help us if Italy gets worse.  Austerity is the medicine for nations drunk on entitlements.  The Greeks who still have jobs are being asked to work a sixth day each week at no additional pay.  The Spanish have cut the salary of all public employees and retirees.

The nations of southern Europe, which generally have a higher level of entitlements, are now objecting to more austerity, arguing their failing economies need stimulus, not austerity.  This is the "Keynesian option" of large deficit spending to kick-start a failing economy.  I agree that the Keynesian option is a fine economic tool but only when the country is NOT already drowning in debt.  That option was forfeited, when those nations used good economic times to expand entitlements, rather than to reduce debt.

When the various European members come to the aid of a weak member, they impose conditions on the bailout.  This "conditionality" has become a dirty word in Europe, especially Spain, who has just refused to accept any additional bailout if any additional conditions or austerity measures are imposed.  The Spanish government says the people have suffered enough and will not tolerate any additional austerity.  So, what happens when the government is out of money -- when the bond markets shut them out?  If the fifth largest economy in Europe defaults, all other member nations will be severely impacted.  It reminds me of the Cuban missile crisis -- who will blink first?  Will the Europeans bail out a member nation without demanding more austerity?  It is high drama, indeed.

I'm glad Merkel and other European leaders think the crisis will be contained, but it also reminds me of Nero fiddling while Rome burned.

Paging Dr. Bernanke

Since Fed Head Bernanke announced Quantitative Easing III (QE3) last week, I have been reading as much analysis about it as possible.  It is another in a series of bold steps to triage the patient.

But, first, quantitative easing occurs when the Fed Reserve buys bonds.  By accepting the bonds, the Fed then credits the checking account of whomever sold them the bonds.  In this case, the seller (U.S. Treasury) now has cash to spend.  That's how you finance a deficit.  It also provides a demand for bonds that did not otherwise exist, and, as everybody knows, if you increase demand for something, the price usually rises.  When the price of bonds increase, that means the yield goes down, since the interest rate is fixed.

Previously, when the U.S. Treasury sold bonds to finance its deficit, there were always plenty of buyers in the marketplace for those bonds.  Then, the Treasury started selling more than the market wanted.  In addition, the Chinese announced they had a bellyful and would increase their holdings of Treasury bonds much more slowly.  (Since they own over a trillion dollars of our bonds, that is probably enough, I think.)

To sell all these new bonds, when the demand is decreasing, the market would normally demand higher interest to be paid.  That would have increased the burden of interest expense for taxpayers and raised the borrowing cost for private debt, such as bank loans and mortgages.  Rising interest rates may be great for savers but awful for an economic recovery.

Does quantitative easing increase the Money Supply?  Theoretically, QE would not increase the money supply if the Fed "sterilized" its purchases, which means they sell a bond every time they buy one.  As a practical matter, I believe it absolutely does increase the Money Supply.

Is that inflationary?  Theoretically, it would not be inflationary if the Fed is agile in decreasing the money supply once the economic recovery becomes permanent.  As a practical matter, I believe it is absolutely inflationary.

Most analysts characterize QE as a "sugar-high."  All that new liquidity washes over the capital markets driving up the stock market.  When people see their 401Ks increase in value, they will feel more wealthy and spend more money, which is critical for a sustainable recovery.  Economists call this the "wealth effect."

It must be working because the stock market has rebounded much more than the economy has.  Maybe, that is because the new money created is not getting into the economy.  It is stuck in the capital markets, providing the "sugar-high."

Other analysts characterize the  Fed's action as a dope-dealer supplying drug-addicts on Wall Street.  The expectation is that there would be no other reason to buy stocks in the face of such a weak economy, which is struggling under the wet blankets of (1) the European financial crisis, (2) the elections, and (3) the fiscal cliff.

My perspective is that the Fed is a good, kind doctor, who is injecting large quantities of both blood and painkillers into one arm of a patient, while a grizzly bear gnaws lazily on the other arm.  Economic policy consists of monetary policy, controlled by the Fed, AND fiscal policy, controlled by Congress.  Both arms are essential to protect the body and fight recession.

As long as Congress is more protective of their political parties than the country, fiscal policy is useless, reducing economic policy to a one-armed fighter.  But, what happens when Dr. Bernanke runs out of blood plasma and painkillers? 

Springtime in Europe

This Spring, things were improving rapidly in Europe.  The ECB had instituted its Long-Term Refinancing Operation (LTRO) program that essentially gave banks a new three-year funding mechanism or three year "lease-on-life."  Interest rates started falling.  Their stock markets were rising.  Optimism bloomed!

Then, it all fell apart . . .

This Fall, things are again improving rapidly in Europe.  The German Supreme Court didn't kill the European Stability Mechanism (ESM).  The European Commission has asked the ECB to supervise all European banks, which is another loss of sovereignty by each member.  The ECB has said it would start buying bonds of member nations, a type of quantitative easing.  Dutch voters approved more political integration.  Their stock markets are all up.  Optimism is blooming again.

And, I expect it will all fall apart again . . .

Nowhere is the problem of entitlements being addressed!  The debt of these nations reflects their level of entitlements.  Even Greece, who was the first country to enter the crisis, has barely touched their level of entitlements.  It took them a full year before they fired one single government employee.

To an economist, the problem is clear.  Entitlements must decline and discretionary spending must decline and taxes rise in some combination.  Eliminating discretionary spending like infrastructure in order to maintain entitlement spending is counter-productive, just as eliminating discretionary spending in order to maintain tax breaks are also counter-productive.

Entitlements are like herpes -- once you have it, you have it always, unfortunately.

So, I don't believe all the optimism blooming in Europe.  We've seen this movie before.

The Most Important Person In The World

On Wednesday, the most important person in the world will be Andreas Vosskuhle.  He is the head of the German Supreme Court, which will rule on the constitutionality of German support for the European Stability Mechanism (ESM).  It is widely believed that the court will support it, which is one of the three legs critically necessary to deal with the European financial crisis.  If the court rules it unconstitutional, the bears will start eating Europe quickly . . . as in tomorrow.

On Thursday, the most important person in the world will be Ben Bernanke.  He is head of the U.S. Federal Reserve system, who will announce the results of their latest meeting.  It is widely expected that he will announce another round of quantitative easing (QE3), which will weaken the dollar and drive up the price of commodities like oil and gold.  If he does not, the bears will be growling on Wall Street.

On Friday, all will return to normal when Angela Merkel is again the most important person in the world.  She is the head of Germany, of course.  Europe cannot recover without her, but she is besieged by her fellow Germans who insist it is better to let the Eurozone break apart -- than to spend the money necessary to save it.  With an occasional day off, she will remain the most important person in the world . . . at least until January 20, 2013.

For The Really Bored

http://www.usabooknews.com/jimflinchum.html 

The Wrong Rand Book

Now that Paul Ryan has received the Republican nomination for Vice-President, there is a resurgence of interest in the writings of Ayn Rand.  The hero in her books is always an intense, self-confident, self-made man who fights over-whelming odds to remain true to his beliefs.

Ryan required his staff to read her book Atlas Shrugged, which describes how John Galt organizes a secret army of entrepreneurs seeking to avoid efforts to crush them by the central government.  This paranoia about government energizes and drives the Tea Party.  It is understandable that a refugee from the Communist revolution, like Ayn Rand, would be so focused on this possibility.  It is also understandable that such a story would resonate so strongly in a nation proud of having fought for its independence.

However, there is much to be learned from her other books.  In Fountainhead, the hero is Howard Roark, who is a brilliant architect that insists on designing buildings differently.  The architectural "establishment" and builders condemn him for championing a design that nobody likes.  Mr. Roark loses all his clients and is forced to become a common laborer but NEVER stops insisting he is right.  (Of course, he prevails in the end.)

In other words, Mr. Roark was not persecuted by government but was persecuted by his peers for not conforming.  Perhaps, that takes even more courage.  It is certainly more lonely.

Ben Bernanke could have refused to exercise his power as Chairman of the Federal Reserve system to make monetary policy responsive to a rapidly weakening economy in 2008.  He could have conformed to the wisdom of central bankers everywhere -- that good monetary policy cannot fix bad fiscal policy or that bankers cannot fix what elected politicians do wrong.  Bernanke argued that this is certainly true in the long-run, but monetary policy can buy enough time for slower-moving politicians to fix their mess in the short-run.  It also demonstrates a certain faith in the political process.  He behaved like Howard Roark in Fountainhead, standing up to his peers.

Mario Draghi is Chairman of the European Central Bank, the central banker of Europe.  He is clearly following the lead of activist central-banker Bernanke.  He has committed himself to saving Europe.  Like the Tea Party here that believes Bernanke is the problem, the Germans and Finns claim Draghi also doesn't have the power or authority to save anybody.  Like Bernanke here, Draghi has said "not on my watch" will there be a full-blown depression.  I wish him well.

The world economy was healthy when Bernanke moved desperately to prevent a depression here.  However, the world economy is not healthy enough now to survive a real depression in Europe.  A European collapse would more likely cause a global collapse.

I lose no sleep worrying about Federal storm-troopers swooping down in black helicopters, not in a nation of 310 million people with 440 million guns.  I do lose sleep worrying that I won't see freighters passing my home, going in and out of the harbor, that I won't hear airplanes landing at the Norfolk airport, that we have a global depression.

Bernanke and Draghi behave like Howard Roark.  They rail against the wind, against the conventional wisdom.  In the end, Roark was redeemed, as I believe Bernanke and Draghi will be.

Jogging Resolution

While jogging through Seashore State Park yesterday morning, I was listening to talk radio and heard the disc jockey say he had to get to bed by 9PM in order to do his 6AM show and had missed Obama's speech the  night before.  Then, the conservative DJ and Romney-supporter added "but I heard it was a good one."

A few minutes later, an irate listener called in, complaining he shouldn't say that without also saying something bad about the speech.  Fumbling briefly, the DJ asked rhetorically if he could not repeat what somebody told him and was told by the irate caller he had an obligation to "badmouth bad people."

After an uncharacteristic silence, the annoyed DJ said -- he promised long ago never to badmouth his ex-wife and, if he was not obligated to badmouth her, then he was not obligated to badmouth anybody else.

Missing the point, the caller then insisted that Obama was going to surrender control of our military to the U.N. immediately after the election.  Realizing the caller was definitely a kook, the DJ said "I don't like you, but I'm not going to badmouth you either.  I'm just going to . . ."  Then, there was a dial tone.

That testy exchange on the radio forced me to make a resolution.  Therefore:  Be it resolved that I will not speak negatively of any person running for office, including Obama and Romney.  It serves no purpose and cheapens anything else I might have to say.  I wish the politicians and their handlers would do the same.

Now, about that ex-wife . . .
  

The Bad News and The Good News

When is good news really bad news?  The unemployment rate just dropped from 8.3% to 8.1% of the workforce.  That must be good news?  Nope!

The latest monthly Jobs Report, prepared by the Department of Labor, was issued this morning.  Economists were expecting about 125 thousand new jobs to be created last month.  Instead, it was only 96 thousand.  Once again, economists merely laugh at their embarrassment. 

The reason that the unemployment rate fell is that the workforce shrank.  368 thousand people gave up last month.  They're not receiving any unemployment benefits.  They're no longer part of the workforce, making the total workforce smaller -- small enough that the unemployment rate of that workforce actually decreased.  And, they're NOT laughing at their embarrassment.

In fact, the labor force participation rate or the percentage of working-age people who are actively working  (full-time & part-time) plus those looking for work has dropped to barely 65%, which is a 30-year-low.  That means one-out-of-three working age Americans is a student, a homemaker, or a drop-out.  That's historic.  What is the value of the work those people NOT doing?

I have an old friend who was a high-flying marketing executive until he lost his job in Atlanta over three years ago.  Since then, he has lost his house.  His family has left him.  He got a minimum-wage retail job for awhile but lost it.  I suspect he lost that job because he started drinking heavily.  I lost contact with him and, about a month ago, called his parents.  They have also lost contact with him and are worried to death about him.  They're not laughing either.  I didn't know what to say, other than I'm sure he'll show up . . . I hope!   

I assume he is out-of-the-workforce, that he is no longer "participating" and is no longer counted.  I suspect he feels like he no longer counts at all.  I'm confident he is not laughing.

Despite all the numbers issued by the DOL each month, they don't tell the full story of our lousy unemployment market.  It is more than a mere political football.  How will we re-integrate millions of people back into the workforce who have lost their jobs, their identify, and their self-esteem?  They sound like damaged goods to me, almost some type of economic PTSD.  I wouldn't hire them, who would?

So, what's the good news?  No matter how bad it is, it could always be worse?  That is right, isn't it? 

A New Tool In The Toolbox

Understandably, economists are always asked about the economy.  We rely on our training, and our experience, while trying to be mindful of our philosophical leanings between the Austrian, the Keynesian, and Supply-side schools of economics.

Some try to avoid the discussion by relying on "technical analysis," which means lots of charts and spooky terms like "double-inverted head & shoulders."  My thinking is that technical analysis is just an interesting way to avoid thinking.

Some months ago, I ran across a quote from Oliver Wendell Holmes.  He said  . . . "When I want to understand what is happening today, I try to decide what will happen tomorrow;  I look back; a page of history is worth a volume of logic."

As a lover of all-things Williamsburg and a proud graduate of William & Mary, his statement resonated with me.  I promptly shifted my reading program more toward history, reading such books as The Panic of 1907 and Manias, Panics, and Crashes.  While reading history is an important part of making predictions, it provides mostly anecdotal lessons and is more useful in predicting the economy than predicting the stock market, which is more quantitative or numbers-driven.

If you look at the stock market as a system of mathematical relationships over time, computers should be able to help make sense of that history. Finally, some bright, young guys from M.I.T. are making significant strides.  Their company name is Hidden Levers, which implies that non-obvious connections can impact each particular portfolio differently.  It is a massive multiple regression analysis between 14,000 stocks and 15,000 mutual funds and 130 economic indicators, requiring literally millions of computations everyday.

As an example, the program tells me that a particular client's portfolio will go down 8.1% if Congress takes us over the Fiscal Cliff.  That doesn't mean I believe it will go down 8.1%.  It tells me the obvious, of course -- that it will go down.  It also tells me that the mathematical probability is that it will go down somewhere between 5% and 10%.  It tells me how vulnerable this particular portfolio is, compared to all other portfolios I manage.  It even tells me some suggested changes I could make now to prevent that loss later.  It tells me a lot!

Will any computer ever predict the future?  No, not precisely!
Will any computer ever be able to predict "black swan" events?  Not a chance!
Will any computer replace human judgment?  No sane computer should even try!
Will any computer make me a better financial advisor?  I think so!
Will any computer improve investment management?  Of course, it already has!

For now, I have a bright, shiny new tool in my toolbox, and I like it!

BTW on Labor Day

From my window on Labor Day, I can see many Americans enjoying the beach.  Meanwhile in Europe, the leader of Germany has finished hiking the Alps, and the leader of France has returned from the Rivera to cobble together enough agreement to end their financial crisis.  At least, I hope so . . . it's only been three years since this crisis began!

Thursday will be an important meeting of the European Central Bank (ECB), when they may announce their own quantitative easing or buying the bonds of weak nations, in order to hold down their borrowing costs.  Next week, the German "Supreme Court" will rule on the constitutionality of the European Stability Mechanism (ESM).  (There will be much consternation if it is declared unconstitutional, which will make the Euro drop, the dollar rise, and gold to fall.)  The following week, all the European Finance Ministers will meet to debate the recommendation to give pieces of their sovereignty to the European Commission, which should be interesting.  I think the European financial crisis is coming to a head over the next 60 days, which means the stock market could be quite volatile during this period.

Domestically, this Friday is one of two days that might determine the presidential election.  They are  September 7th and October 5th.  On those days, the Department of Labor will issue their monthly "jobs report."  IF anybody in this country has not already decided how they will vote, they might be strongly influenced by this information.

Just remember, as you hear Republicans and Democrats warn of how bad America will be -- if the other side wins -- that it could be worse . . . you could be going back to work in Europe . . . or even worse, looking for work  in Europe -- where unemployment is 11.3% (25.1% in Spain)!

So, ignore the American politicians -- you already know how you will vote!  Instead, keep your attention on Europe . . . 

Thank Goodness for Ava Gardner

There was an informal survey of financial advisors on CNBC yesterday, showing an over-whelming 68% of us think the most important event this year will be the November election.  I guess all those financial advisors watched the Republican Convention last week and are looking forward to the Democratic Convention this week . . . not me.

I plan to watch the exact amount of the Democratic Convention as I did the Republican Convention, which was zero, zilch, or none-at-all.

Nobody ever called any political convention a "no-spin zone."  They are giant, glossy infomercials, with a complete anti-intellectual bias.  Indeed, even face-to-face debates are mere contests in which candidate can remember the most applause lines, as pre-determined by focus groups.  It is pre-packaged spontaneity.

All suffer from the conceit that David Brooks described in his excellent column last week, i.e., they talk as if they will govern without the existence of the other party.  Why bother to listen to that?  The possibility does not even exist.   It would be an alternative reality.

Last week, I was fortunate to watch two old, classic Ava Gardner movies (Night of the Iguana and 55 Days at Peking) during the Convention coverage.  Let's hope the Turner Classic Movies channel will be as good next week.

I am among the 19% of financial advisors who believe the most important event of the year will be the European financial crisis.  While little has happened over the summer, as expected, the little that did happen was quite positive.  There is reason to believe that this September and October could be the critical months, when we finally achieve some clarity, if not resolution.  However, if we do get a clear resolution in the near future, I expect to get bullish again quickly.

My expectation about the November election is that it might alter the degree of gridlock but not end it.  My expectation about the Fiscal Cliff is that the elected Congressional cowards, who care more about their re-election than their country, will once again vote to "kick the can down the road" by simply changing the effective date to the following year.

So next week, I'll be looking for the remote control again.  Besides, what man wouldn't prefer looking at Ava Gardner instead of Romney or Obama?

The Joy of Cartoons

So, who is the all-important swing voter listening to ??

Generational Baggage

It's hard not to think of particular individuals when reading a book about people.  I've been reading The New Retirementality by Mitch Anthony, and it is a "must-read" for Baby-Boomers.  It reminds me of the many, many Baby-Boomers I have talked with, who are bitter and disappointed that they will not enjoy the retirement their parents did.  Their parents were usually more frugal but still spent enough to enjoy life.  More importantly, their parents benefited from the times they lived in.  Baby-Boomers feel they have failed personally, when they were really just misled by The Greatest Generation, who lead them to believe a good retirement comes to those who work hard.

For most of mankind's history, we just got old and died.  Hopefully, we worked to pull our weight until the date of death.  In the early 1900s, sociologists and business academics began writing that workers over the age of  40 (yes, forty) were actual burdens on productivity and could slow down the production lines.  Age discrimination became commonplace, and workers were routinely fired if the production line slowed.

Fortunately, America was a young, growing nation of profitable companies who learned they could attract more-talented workers if they promised to treat the workers better when they got old.  For the rest of the workforce, the less-talented workers, they got what became known as Social Security.

Pension plans became commonplace, especially following World War II, which means they have been commonplace for only 70-75 years in the history of mankind.  Indeed, pension plans became more commonplace for The Greatest Generation but less commonplace for the Baby-Boomers.  Having lost the need for desperate frugality as children of The Greatest Generation, Baby-Boomers are painfully surprised to learn how important frugality was and how corrupted they have been by advertisements to consume.

The book goes on to build a solid case for changing a person's work skills so they can remain financially productive and useful throughout life.  I strongly recommend it to all Baby-Boomers!

But, throughout the book, I kept thinking about a particular lifelong friend, who is part of The Greatest Generation.  The ONLY thing he ever wanted to do in life was to NOT work.  Apparently, work is bad for people??  Fortunately, he got a job with the Federal government and retired at the tender age of 55.  He is now 89 and making more in retirement than he ever made when he was working.  He has been retired more years than he worked.  I would expect he would pat himself on the back for "beating the system" or getting a sweet deal.

Instead, he feels like a victim . . . because he worked at all.  Maybe, he remembers early sociologists who said a worker was "over-the-hill" at an early age.  Maybe, he remembers World War II, even though he never saw combat.  Maybe, he believed all the assumptions of Tom Brokaw's The Greatest Generation.  Or, maybe, he just had a depressive personality-type.  I don't know, but it is sad to see a person live so long with such good fortune and still feel sorry for himself.  As a boy, I was taught that "idle hands are the Devil's tools."  So is idle time, and I strongly believe that is a huge problem in retirement.

Read The New Retirementality, stop feeling like a failure, get off your butt, and make a plan!

Hitting the Snooze Button

During the past month or so, the previously-scary stock market has been pleasantly tranquil.  I expect it will remain that way another week or so.

In the meantime, the Fed holds its annual symposium in Jackson Hole, Wyoming.  This is an important meeting of central bankers worldwide (except ECB's Draghi).  It is very informal, with the most important conversations held in hallways and outdoors, viewing the majestic Grand Teton mountains.

Fed chief Bernanke will speak this Friday.  Two years ago, he announced the first quantitative easing program at this meeting.  While he is expected to announce another round of quantitative easing next month, he is not expected to say anything significant this Friday.  If he does say anything significant, the stock market is not likely to over-react as it usually does, because traders have cleared out for one last long weekend of vacation before the Fall season begins.

The Fed hates this time during the election cycle anyway.  Any action they take or don't take right before the election is considered "political."  They are indeed damned if they do and damned if they don't.

Next week, the Europeans begin returning from vacation, which is a far greater risk to our market.  There have been some hopeful signs, such as that Merkel has been urging other leaders to tone down their rhetoric and has been letting her Finance Minister take the lead.  Her approval numbers have increased, giving her a little more negotiating room.  But, in the end, Europeans will produce more drama than results, which drives the stock market crazy.  I expect significant downside risk over the next few months because of Europe.

Then, in case you forgot, there is a U.S. Presidential election.  I was hoping either party will win by a clear, foreseeable landslide.  However, as the election is apparently so tight, the stock market may go into election night with no idea of whether to buy or sell the next day.  Take comfort in the fact that the stock market is generally bullish during November and December of each Presidential election year.

That traditionally bullish close to the year may not happen this year, as we are approaching the dreaded Fiscal Cliff, when tax rates go up and government spending goes down.  I'm not as worried about that happening as before.  Only the Tea Party seems driven by principle to go over the cliff.  Both the Establishment Republicans and Democrats are willing to "kick the can down the road."

Maybe, the Tea Party is right?  Maybe, a 5% recession is worth it, in order to finally deal with the issues.  (The last one was a 6.4% recession.)  But, would the Tea Party be willing to negotiate even then, once we are over the Cliff?  If not, it would be worse than a 5% recession.

So, hit the snooze button and enjoy the end of summer . . . you'll need to be well-rested this Fall.

Romney's Real Religion ?

Ever since Ronald Reagan accepted the teachings of Arthur Laffer and became a born-again Supply-sider, Republicans have been required to genuflect on the altar of Supply-side economics, which believes that leaving money with the rich allows them to create jobs.

Since Romney is a member of the wealthy 1% and only paid 14% of his income in taxes, it is reasonable to assume he was also a true-believer of Supply-side economics.  Interesting, there is reason to suspect he may instead be a closet Austrian economist, who believes in balancing the budget even if it means tax increases for the rich.

His team has leaked that he is willing to cap the interest deduction on home mortgages for high-income earners.  This is tantamount to a tax increase.

He thinks the tax exemption for interest earned on municipal bonds needs to be reduced.  This is tantamount to a tax increase.

He wants to limit the exclusion from gross income for high-value executive employer-provided health insurance.  This is tantamount to a tax increase.

He even wants to end the exclusion for earnings on life insurance policies.  Again, this is tantamount to a tax increase.

Of course, all these tax increases could be offset by a decrease in the highest marginal tax rates, but it tells me that Romney might be willing to come out of the closet and actually balance the budget.  If so, he will be the first Republican since Reagan to actually do so.

I've got my fingers crossed . . .

The Gold Standard or Constitutional Discipline?

Largely as a result of Ron Paul's remarkable organizational abilities during the long Republican primary, the party platform will, for the first time in twenty years, advocate a return to the gold standard.  This strongly appeals to those who believe it will automatically limit spending.  As usual, it is more complicated.

America was on the gold standard until President Nixon took us off of it in 1971 during the first oil crisis.  At that time, an ounce of gold was slightly over $20 each.  Today, our money supply is roughly $2.56 TRILLION, and it is backed by only 262 million ounces of gold.  That means gold would soar to $10,000 per ounce, which would be one gigantic economic adjustment.  If you believe the Republican Party will actually do this, you should consider buying gold now.

To keep the arithmetic simple, let's assume the current market value of gold is $2,000 per ounce.  That means our money supply might be 400% too large for the amount of gold backing the dollar.  Shrinking our money supply that much and doing it suddenly will certainly cause another depression.

Returning to the gold standard would be an admission that elected politicians are incapable of making the hard decisions, and I would agree with that.

Another approach would be a balanced budget amendment to the Constitution, which is also an admission that elected politicians are incapable of making hard decisions, and I would agree with that again.

However, one of the main reasons that Nixon killed the gold standard over forty years ago was because his policy options were limited by it.  He was under political pressure to "do something" about the high levl of unemployment and wanted to engage in deficit spending.  (This is a Keynesian fiscal approach.)  He needed freedom to act, and the unemployed appreciated his actions.  Unfortunately, he made a long-term change to our financial system to fix a short-term problem.

A better approach would be the Austrian or "tough love" solution of requiring the budget to be balanced but, instead of being balanced every single year, over every four-year rolling period.  If you have a big deficit this year, it is fine to take a Keynesian approach and have deficit spending, but then you must produce enough surplus over the next three years to pay off the deficit.

Yes, there would be problems with implementing this solution, but it would still be far better than our current reliance on the elected children in Congress to make the hard decisions for us.

The Joy of Intelligent Voters

Readers know I divide the world of economics into three schools.  There is the Austrian or "Tough Love" school that argues a balanced budget is essential every year.  There is the Keynesian school that argues deficit spending is essential when the economy is weak.  Then, there is the Supply-side school that argues a cut in the highest marginal tax rate is always essential.  No one school is better or worse than the others.  Different situations demand different solutions.

Back during the dark ages of 2009, there was fear that the world financial system was bordering on collapse.  In the U.S., we enacted the $787 billion stimulus bill.  That was a Keynesian solution, which I supported, despite being an Austrian-at-heart.

In eastern Europe, there is the small (1.2 million people) nation of Estonia.  They took the Austrian approach of cutting spending AND raising taxes.  The government froze all pensions, cut salaries by 10%, and raised their value-added-tax a whopping 2%.  They did not borrow money to keep going.  In other words, they did not borrow money to pacify their people.  Their debt remained about 7% of GDP, compared to our debt level of approximately 100%.

Despite our stimulus bill, our GDP shrank 6%.  The Estonian GDP shrank a stunning 14% -- over twice as bad as ours.  Unemployment soared to a heart-breaking 16%!  The Estonian people suffered greatly . . .

Today, unemployment in Estonia is "only" 10.8% but dropping.  It is dropping because GDP is growing -- rapidly -- 7.5% last year (think China-like growth), compared to the U.S. rate of about 2%.  The Estonian people suffered greatly . . . but not for long!   They just ripped-off the scab!

When facing dire economic circumstances, the U.S. took a Keynesian approach of increasing debt.  Estonia took the Austrian approach of cutting spending AND raising taxes, rebuking the Supply-siders.  So, which is the right approach?

As always, it depends . . . it depends on how the populations will react.  Can you imagine the outcry if we froze all pensions, cut government salaries 10%, and raised taxes significantly?  The Estonia people accepted hardship stoically, which permitted their government to do the right thing.  I don't think anyone ever called Americans stoic.

Now, would you rather be President of the U.S. or Estonia?

An Expensively Sweet Subject

Recently, Mayor Bloomberg of New York City proposed a prohibition on sugar drinks larger than 32 ounces.  My first thought was . . . NANNY STATE - I don't need no government bureaucrat telling me what to eat or drink.  I still feel the same way.

Later, I read Mayor Bloomberg's reasoning that obesity was driving up his health care expenses, which he was trying to control.  As it is now, an irresponsible consumer of sugar (or alcohol or tobacco) becomes a burden on either the taxpayers or other policy holders or both.  Why should I pay the obesity-related healthcare costs for people who eat sugar carelessly?

On a short road trip this weekend, I was in a convenience store, standing in line behind a mother with two kids.  Those kids each wanted a 12-oz bottle of sugar water (Coke) plus a bag of some candy I never heard of.  In fact, they were insistent that they NEEDED the sugar water and candy, AND they NEEDED that particular type of sugar water and candy.

Even though it is considered cute in our culture to watch children put unhealthy foodstuffs into their mouth, this young mother didn't want to do it and suggested less unhealthy options to no avail.  As someone who had to stand in line next to the strident children, I was relieved when she finally relented and paid $3.71 to pacify the kids.  After all, anybody who has ever been in a car with two cranky, disappointed children knows that $3.71 is a small price to avoid it.

As I drove away, I suspected the kids wanted sugar because it tastes good, and society smiles at kids having it.  It was more interesting to me that they had strong feelings about the particular sugar drink and candy.  That  could come from long trial & error, which I doubt, or recommendations from their peers, which is possible, or from TV advertising, which is the most likely.

While Mayor Bloomberg is right to control his health care expenses, should he try to regulate behavior of adults or should he tax the advertisers of unhealthy foodstuffs and use that revenue to cover obesity-related healthcare costs?  (Certainly, that tax or increased cost to sugar sellers would be passed on to the consumer, making the product more expensive, but maybe that will also discourage buying it.)

Do we really expect the good intentions of a young mother to overcome the relentless carpet-bombing of TV commercials?  Is that fair to the young mother?  And, when she fails, why do taxpayers have to pay for the medical costs of her kids when they become obese and elderly?

The Bull Days of Summer

Readers know I've been increasing cash for the last few months, expecting possibly severe turbulence the rest of the year.  But, the market has been drifting upwards over the last six weeks.  Does that mean the bull has returned?  In a word . . . No!

I would be more likely to believe the bull had returned if trading volumes had increased.  That would suggest investors are returning to the market, but this is not the case.  The dog days of summer normally see little action, and this is no exception.  However, trading volumes are even low for the summertime, running about 40% below normal.  The retail investor is definitely staying out of the market.

In addition, a bull market is traditionally "confirmed" when the Dow Transportation Index also rises, which has not been the case this summer.  The theory is that the market will be rising if the economy is doing better, and we'll know that when trucks and trains are carrying more goods, which makes the Transportation Index rise.  Without that confirmation, the bull rally only looks temporary.

My perspective is that the U.S. stock market has been a one-trick pony all year, reacting only to news out of Europe, who is on "holiday" right now, thank goodness!  Once European politicians get back to their usual work of  accomplishing very little, I expect we'll get whip-sawed again.  (I was worried the crisis would erupt again on August 20th, if Greece didn't make their bond payments due that day, but it appears they have now raised enough money to postpone the crisis until September.)

During the fall season, the conventional wisdom is that the market will start rising when it believes Romney will win, but I expect the market will not start rising until it believes gridlock will end, i.e., if the Senate also goes Republican, which won't be known until the election itself.  We'll see. . .

In the meantime, just enjoy the warm afterglow of a bull during the dog days of summer.  Better yet, join the Europeans and go on vacation yourself!

First Guest Blogger

Most blogs allow for readers to post their comments and react to whatever the blogger wrote.  This blog does not permit that . . . and for a very good reason -- securities regulators are like traffic police, i.e., they are humor impaired.

If a client responded to something I wrote with a kind word, I would be in trouble with the regulators for allowing what they call a "testimonial."  Therefore, nobody is allowed to respond to this blog.  However, that doesn't stop clients from emailing me directly.

I received one yesterday that I thought was interesting and, with his permission, am doing a copy/paste of his email into this blog today.  (Because he doesn't mention me, I am permitted to publish it, but not his name.)  Therefore, please welcome our first guest blogger!

Decision

For years, I considered myself Independent.  I favored neither the ideology of the right or the left. I am very much toward the center.  I believed that there were good people on both sides and adjusted my vote accordingly.

Today, I tune out the rhetoric.  The TV ads are assigned to my internal SPAM folder.  Being results oriented, I look at what has happened.

In 2008 this country was bleeding jobs by the hundreds of thousand, home prices were in free-fall. 

Foreclosures were the headlines, and the country was bleeding money, as well as precious lives in two drawn-out wars.

Our foreign relations were in the tank, and our respect overseas was negative.

Starting three years ago, we began seeing positive employment figures.  Now we are often seeing hundreds of thousand of jobs being created every month.  IRA's, which tanked in 2009 with the DJIA at 6500, have now recovered with the DJIA above 13,000.  Three years ago, we saw home prices start to slow their drop.  Today, we read of home shortages, as well as increased home sales -- with home prices rising! Three years ago, our malls and highways were empty. Our entertainment destinations also. Not so today.

Today, our Government is respected throughout the world.  Our foreign policy is one of our strong points.  We have greatly reduced the financial drain by pulling out of Iraq and are now disengaging from Afghanistan.  Our exports are recovering nicely, especially compared to the rest of the world whose exports are decreasing.  Manufacturing jobs are returning to the United States. Amazingly, Honda is increasing production of vehicles in the United States for export!  We are becoming energy independent with new enormous oil and gas reserves and with an emerging alternate energy industry. Highways are jammed, destinations are very busy.

This is a remarkable recovery in four years. Particularly remarkable since the present administration has had to accomplish this against the continuous objections, roadblocks and active obstructions of the opposing party. Their Legislators have publicly stated, contrary to their oath of office, that their primary mission in the legislature is to deny the just elected President another term.  Result: greatly slower than necessary recovery.

No amount of rhetoric or false facts can refute the obvious. The choice is between the successful and the obstructionists.  I choose the Successful.