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Who runs the Country?

Published on: 03/02/2009

Categories: Current Events

Tags: business, Congress, democrats, finance, house of representatives, investing, investments, lies, money, obama, political, politics, republicans, Senate, stocks

Comments: 7 Comments

By Fred Carach

In American history there have been two great defining elections. All other American elections are insignificant in comparison. The first great defining election was the election of Abraham Lincoln in 1860 that ushered in the great period of Republican Party dominance, which lasted from the civil war until the Great Depression. The second great defining election was the election of Franklin Roosevelt in 1932, which ushered in the great period of Democratic Party dominance.
This dominance has just been re certified by the recent election of President Obama.

After the historic election of 1932, the Democrats faced a shattered opposition. Just as they do today. The Democratic Party then dominated politics at every level of government. The overwhelming majority of all the mayors in the country were Democratic . The overwhelming majority of all the state legislatures were Democratic. The overwhelming majority of all the state governors were Democratic. Democrats dominated both houses of Congress and the president was a democrat. Nothing has changed in 77 years. Eight decades later the dominance of the Democratic Party at every level of government is almost as total as it was in 1932.
Nothing better demonstrated their strangle hold on political power than their absolute domination of the House of Representatives for 62 straight years from 1932 to 1994. Under our system, command of the house alone granted Democrats perpetual blocking power over all legislation.

What two party system are people talking about? The simple truth of the matter is that we do not have a two party system in this country and have not had one since 1932. What we have is a one and a half party system, which is pretending to be a two party system. The only level of government at which the Republican Party is competitive is the presidency. Remove that and there is nothing left.

The question that has to be asked is how has the press missed this? Are they really that stupid or are they just pretending to be that stupid? The truth of the matter is that I just do not know. Both presumptions seem equally plausible to me.

As for the Democrats, the Republicans serve a very useful purpose. They are the perpetual fall guy and whipping boy of the Democratic Party whenever things go wrong. Just ask yourself what would the Democrats do if it ever dawned on the people that the lion’s share of everything that has gone wrong in this country since 1932 was the fault of the Democratic Party? Things could get very ugly. Besides they like having the Republicans to kick around.

We now come to the vexing problem of the alleged power of the presidency to influence the economy. This idiotic belief is something that the Democrats have had a field day promoting ever since they rose to power in 1932 with their vicious attacks on President Hoover. Since their control of congress since 1932 has been almost perpetual and the presidency is the only branch of government in which the Republicans are competitive. There are enormous rewards for the Democrats in shifting the blame for economic hard times from congress where it belongs and in promoting the myth of presidential economic responsibility.

This domination not only extends to their control of the press but to popular beliefs as well.
Consider this, all my life I have wondered why the Hoover Dam was called the Hoover Dam
instead of the Roosevelt Dam. After all, we all know that after the stock market crash of 1929 President Hoover and the Republicans sat around in a stupor and did nothing while the country went to hell. Don’t we? Then the heroic Democrats took over and saved the country in the 1930s with their huge public works projects. The most massive of which was the Hoover Dam and the magnificent Golden Gate Bridge.

Recently, I was stunned to discover that the Hoover Dam and the Golden Gate Bridge and god only knows what other major public works projects of the 1930s were authorized not under Roosevelt which is what we all believe but under President Hoover!

How sweet it is! This is domination, total and complete.

When the Democratic Party took control of the country in 1932 their position was ideal. They had assumed power when the country was at rock bottom. Things could not possibly have gotten any worse. The stock market had lost 91% of its value and 5,000 banks had failed. The unemployment rate was at 24%. If they had done nothing for the rest of the decade except giggle stupidly at themselves the economy would have improved.

They instead embarked on the most advanced economic thinking of the day. Keynesian economic theory, which held that vast government public work programs was the solution to the depression. It should have worked but it didn’t.

I would have supported these programs. Just as I support public works programs for today’s recession.

The failure of these public works programs to end the depression is astonishing. The unemployment numbers are so bad that it is hard to believe them. In 1932 the unemployment rate was 23.6%. In 1933 it was 24.9%. In 1934 it was 21.7%. In 1935 it was 20.1%. In 1936 it was 16.9%. In 1937 it was 14.3%. In 1938 it was 19%. In 1939 it was 17.2%.

Then salvation came. It was the armaments production of World War Two that saved the day. Not Keynesian public works projects.The 1929 GDP was not exceeded until 1943 well into the war. It was not until 1955 that the 1929 stock market peak was exceeded.

The Democratic propaganda machine is a Juggernaut. Almost everyone believes that the Democratic Party and its vast public works projects saved the country in the 1930s after the stupid, do-nothing Republican Party had wrecked it. The Republicans don’t stand a chance. They don’t have a chance!

The American people in their ignorance have been adamant since day one that when the economy goes south the person to blame is the president. The problem with this cherished belief is that when the economy blows up the president cannot possibly be blamed because the constitution does not grant the president economic powers. Only congress is granted economic powers. There can be only one possible explanation for this belief. At least 80% of the American people must have been in a stupor when the constitution was being explained to them in civics class.
The president is commander-in-chief of the armed forces and the chief executive officer or CEO of the federal bureaucracy. And he is the co-equal with the congress in diplomacy and foreign affairs. And that is where his powers end. His powers to influence the economy for good or ill are zero, Nada, zip.

The constitution grants congress total political power to influence the economy through its monopoly power to write laws effecting the economy and its power to spend money. Consider this; congress has the power to remove the president from office. But the president cannot remove one single member of congress from office. Congress can override the president by overriding his veto and thus impose its will on the president.But the president is powerless to override the will of congress if his veto is not sustained.

At this point some cretin will step forward and allege that while all this is true it is usually the case that congress follows the will of the president. You cannot be serious! What fantasy land have you been living in! Everything depends on which party controls congress. If his party controls congress, the president has a reasonable chance of getting something that vaguely resembles his proposal through. And this holds true only if you do not make the mistake of reading the legislation. If you read the legislation you are in for a rude disappointment. You will find that there is a yawning gap that looks like the Grand Canyon between what the president proposes and the legislation that he finally ends up signing. If on the other hand the president’s party does not control congress, forget it.

Recently, we have had a textbook demonstration of who holds the whip hand. When Treasury Secretary Paulson on September 20, 2008 presented President Bush’s now notorious $700 billion TARP program to congress. The proposal was written on three and a half pages. After he got through whining and begging the imperial congress presented the president with its own TARP program. A 450 page detailed document that after the president signed it had the force of law. Case closed!

Who runs the country,the Democratic Party? Who is responsible for the economy, the United States Congress?

Fred Carach is the author of the book, “Forty Years A Speculator” and his essays and pod casts can be viewed on his blog at fortyyearsaspeculator.blogspot.com

A Game of Confidence

by TwoCentsEditor

Published on: 02/27/2009

Categories: Current Events, Economics, My Two Cents

Comments: 4 Comments

A scan of the financial and economic landscape of any society during solid, genuinely prosperous times will always reveal a populace brimming with confidence. Confidence in their ability to make a living, confidence in the ability of their leaders, confidence in the workings of their financial markets to whatever extent they exist, and ultimately confidence in the strength of their money. These factors are all interlocking directorates; take any one of them away and you’ll witness an economy that is no longer efficient and begins to stumble. Take them all away and you’ll witness unbridled economic chaos.

It is the latter statement that causes me to reflect this week on the prospects for our return to prosperity. We have had the opportunity over the past year to listen to many speeches from Presidents to heads of Treasury and the Federal Reserve. Many men and women – bright men and women, have weighed in and opined on our current situation. They’ve spoken of stimulus, of consumer spending, government spending, bridges, roads, healthcare, energy, banks, and many other topics too numerous to count in this short space. However, what I haven’t heard nearly enough mention of is confidence even though the stated purpose and intent of these speeches has been to inspire the same.

The confidence of consumers

One report in particular has made some inroads in terms of getting coverage of the precipitous drop in overall consumer confidence. And in fact, the most recent release of the Conference Board’s measurement of consumer confidence was the worst in history since measurements began more than 40 years ago. Perhaps the worst part of this report was the expectations component, which absolutely fell off a cliff, plunging from a level of 42.5 to a 27.5 level. The jobs component of the report was no better. 47.3% of those surveyed expect there to be fewer jobs in the future with a mere 7.1% expecting more jobs. 4.4% thought jobs are easy get with nearly half (47.8%) opining that jobs are very hard to get. The chart below tells the awful story.

Consumer Confidence Chart

It is fairly easy to see how the lack of confidence has translated into overall drops in retail sales. Sure people are spending less for gasoline (a major component of retail sales) than they were a year ago, but they certainly aren’t buying anything else in its place either.

This situation, however, goes way beyond some numbers reported every month. It goes to the very heart of the opening paragraph. Confidence is the key to a successful economy, particularly ours, which is so heavily dependent on the consumer taking on debt and spending money. In order to perpetuate this dynamic, the consumer needs to have utmost confidence. As last 2008’s failed stimulus package demonstrates, simply handing money to consumers who are not confident will result in the money being saved or used to pay off existing bills. No confidence, no spending. It’s as simple as that.

Collapse of retirement contributions a referendum on confidence in the financial system

Whether it is along with, beside, or because of consumer’s confidence, equity markets on a global scale have crashed in grand form over the past year. Sure, not all of that was caused by the little guy selling his 401(k)/IRA and going to cash. It is our opinion that the little guy actually represents a relatively small component of the overall money invested in the markets when leverage is factored in. However, the little guy’s actions have still had major ramifications. Consider the following:

• 529 plan contributions are down an average of 60% from 2007 according to a 529 plan representative who materialized at my office door a few weeks ago

• According to TD Ameritrade, 63% of people with retirement plans stopped contributing to them in 2008

• Only 21% of individuals surveyed in the above study had more than $50,000 in investable savings

• Unemployment (32%) and increases in health care premiums (25) were the leading reasons why people stopped contributing to retirement plans in 2008

• Nearly 25% of survey respondents in the 35-44 age group said they’d completely stopped contributing to retirement accounts in 2008. This more than any other group

While complete data for 2008 contributions is incomplete due to the fact that 4/15/09 is the deadline for 2008 IRA contributions, it is relatively clear that 2008 contributions will be down significantly. This problem is two-fold. The first is many people don’t have the funds to invest. The second is that they have lost confidence in the markets and their ability to protect (let alone grow) capital. This reality is unfolding at an unprecedented time in history – a time when people can least afford to be caught without savings.

Job loss – the ultimate confidence-killer

As now more than 600,000 Americans each week are realizing, the loss of a job is one of the most stressful events one can endure. There is an old adage that it is a recession when your neighbor loses his job, but it is a depression when you lose yours. This is not meant to trivialize the matter of unemployment in the least, but rather to underscore the effect that the loss of one’s livelihood has on confidence. As can be expected, consumer confidence has plunged as job losses continue to increase.

Unemployment Graph

Next Friday’s unemployment report is likely to feature an unemployment rate well north of 8% not counting the thousands of workers who lost their jobs in late 2007 and early 2008 that have now fallen off the unemployment rolls and as such are no longer counted. By our count, there have been nearly 2.4 million first time claims for unemployment in the past 4 weeks alone and the trend shows no signs of slowing, at least not in the short term. While unemployment insurance lasts up to a year (depending on the state), it only covers a portion of lost earnings. A good average is probably around 60%. I don’t know about you, but I don’t know too many people who can maintain their current standard of living on 60% of their income – or are even willing to try.

Money – A True Crisis of Confidence

Confidence in the monetary system of the United States has been a true lagging indicator. Inflation at a rate of 5% or so per year has been institutionalized in the system for as long as anyone can remember. Keynesian economics teaches us that this inflation is a normal by-product of growth and should be accepted with glee, which is absolute nonsense. This is akin to welcoming a burglar into your home and offering him 5% of your belongings then chalking it up as a cost of living.

However, even the most regular of folks are starting to wonder where the trillions of dollars for their retirements, healthcare, financial system bailouts, various industry bailouts, state bailouts, government spending, and other pet political projects are going to come from. The fact is we’ve crossed the Rubicon in this regard. The world no longer creates enough savings to cover our massive balance of payments and fiscal deficits. And remember, one in three Americans have less than $50,000 in savings to deal with this. Everyday Americans are starting to wake up to the reality that this money doesn’t exist and must be created from nothing. That certainly doesn’t bode well for their confidence in the value of the currency they carry in their pockets. It can no longer be called money, because to call it money is to imply that it is a store of wealth and acts as a standard unit of exchange.

A real store of wealth holds its value and maintains purchasing power. The US dollar has lost around 96% of its purchasing power since the Fed was created in 1913. Other paper currencies are not far behind. This reality has driven record demand for gold and silver coins as the public awakens and attempts to diversify out of paper. This overall loss in confidence in paper assets is what drives mainstream columnists to attack gold as a ‘useless rock’ and float the false notion that people who bought stock after the 1929 crash got their money back in a few years when in fact it took a few decades. Remember, it is all about confidence.

In the end, the financial crisis of 2007-? will be summed up as a fairly simple process:

1) Confidence shaken

2) More debt accumulated to maintain confidence

3) Confidence further shaken

3) Even more debt accumulated

4) Confidence lost because of all the debt accumulated

For in fact during the early stages of the crisis, policymakers and pundits alike were busy talking about strong economic fundamentals and failing to address the root causes of the problem when it might have mattered. For nearly 9 months the current depression brewed before Fed head Bernanke and Treasury Secy. Paulson were even willing to admit that a problem existed outside the banking system. The entire sum total of their efforts was to maintain confidence. It was a dangerous gamble that has proven disastrous and they’re about to learn the hard way that while you might be able to create a bailout for big banks and big government, there is no bailout for confidence.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.suttonfinance.net and clicking the free report banner.

Disclosures: Long GDX

The Turning of the Tide?

by TwoCentsEditor

Published on: 02/20/2009

Categories: Current Events, Economics, Financial Markets, My Two Cents

Comments: 3 Comments

For the better part of the second half of 2008, the decision was an easy one. For the first 30 or so days of 2009, the decision remained easy. Then something changed. Something subtle, but at the same time worthy of our utmost attention. Producer and consumer prices began to climb off the mat and beginning in January 2009, there has been a rather remarkable turnaround. Granted, one month does not a trend make, but in this environment, big moves, which have become commonplace bear even more study when they reverse themselves on a dime.

Ironically, this is the second such major trend shift that we have witnessed in the past 75 days. On 12/5/08, a two-year relationship between WTIC and the Euro ended abruptly. From 12/1/2006 through 12/5/2008, WTIC and the Euro had walked in lock step to a level of statistical significance rarely witnessed. What we had in effect was a pegging of the Euro and Crude oil. A peg that ended on 12/5/2008.

This morning the CPI for January 2009 was released and showed a marked and striking divergence from the trend of the past 6 months. The headline and core numbers both reverted from their ‘deflation-mode’ back to their ‘inflation-mode’ of late 2007 and early 2008. We have spoken about such a possible inflection point for quite a long time, making the following observation on 11/21/2008:

“However it must be noted that perhaps the biggest ‘fundamental’ arguing for increases in equity markets is the trillions of Dollars in new money and credit that has been pumped into financial institutions over the past few months. For whatever reason, that money has largely stayed on the sidelines for the meantime. It is our firm belief, however, that this will change, and when it does we’ll have ourselves another epic paradigm shift, and cash will once again become trash. Identifying the inflection point will be the key. Stay tuned.”

We spoke of this situation again on 12/12/2008:

“Now, consider the monetary environment within which we are operating at the present time. Much like the yields on short-term Treasury bills there is zero discipline. None. Money is being created on a massive and unprecedented scale. This is precisely why the banks are sitting on it. If this money were released en masse into the real economy, we would have hyperinflation at the precise time when economic activity is grinding to a halt.”

Unfortunately, as the December disconnect between oil and the Euro and the concomitant reversal in consumer price trends (yes, we believe there is linkage there) indicates, we may have in fact witnessed the inflection point when we see the value of cash again come under attack. If in fact this is the case, Gold will have once again been something of a front-runner despite what have been extraordinary efforts to quench gold’s march upward over the years.

And speaking of gold, this writer took a lot of flak back at the end of August 2008 for calling Gold the ‘Opportunity of a Lifetime’. Especially when the price dipped under $700/oz for a brief time in November. Gold bears of every stripe took their shots. Granted, the game is far from over, but let’s just take a look at Gold versus the DJIA for a minute. Gold is up over 16% since that article was written, the paper DJIA down nearly 36%. If this doesn’t outline the reasons for holding at least a portion of one’s assets in real money, then nothing will.

Clearly these are dangerous times for investment portfolios and the underlying wealth they represent. During a massive liquidation phase, it was an easy call to sit on the sidelines, collecting nominal interest from bonds, CD’s, and money market funds because we were secure in the knowledge that the money was becoming worth more. Come again? Think in terms of a gallon of gas for example. A good price for a gallon of regular was around $4 last summer. A good average price now is around $2/gallon. So if you had a $20 bill in your pocket last summer, it would have purchased 5 gallons of gas. Now that same $20 bill buys 10 gallons. Obviously the same situation has occurred in terms of stocks and real estate. The money is worth more now than it was last summer. The value of the money wasn’t under attack.

Since the creation of the Federal Reserve System in 1913, this phenomenon has been the rare exception rather than the rule, and as such, consumers are less able to quickly recognize and understand the implications.

However, at the same time, in other areas, this has not been the case. Food prices have continued to be persistently high although their rate of increase has slowed somewhat. We have been writing and talking for over two years now about sector-based inflation and how consumers are going to really have to keep their eye on the ball in terms of what is going up and what is going down. The current consumer price environment is indicative of this situation. Ideally, money allocated for food, medical needs, education, and lately, gasoline should be spent today because it will be worth less tomorrow. In the opposite, money allocated for investment in stocks and real estate should be saved because it will be worth more tomorrow. What a world we live in.

If we have indeed witnessed the inflection point where the trillions of dollars parked in investment and commercial banks are finally being let out to play, then our wealth and purchasing power are about to come under serious attack. Obviously the risk in putting such an assertion to paper is that if we return to the previous trend of falling prices even for a brief time, the entire construct will be discredited rather than the possibility that the timing was a bit off being acknowledged.

There are some factors that would help us to confirm or deny that such an inflection point has taken place.

Gold – Gold is in confirmation mode at the present time. It has roared back from the high 600’s in November to the precipice of $1000 – a whopping 43% increase, much of it in the time since the Euro-WTIC peg ended on 12/5/2008. We have discussed in our Centsible Investor newsletter for some months now the triumvirate of gold, oil, and the Euro and been following the developing relationships closely. This has enabled us to make the call on inflation quickly as opposed to being 3 or 6 months in arrears. The obvious risk is that we could be early in making this call.

Gold Chart

CRB Commodities Index – Unlike Gold, the CRB (of which Gold is a component) has not confirmed that such a trend change has taken place. However, as is clearly demonstrated in the chart below, the CRB Index is searching for a bottom and in fact several of the long term indicators we compile internally are close to giving longer term ‘buy’ signals.

CRB Chart

Crude Oil – WTIC, which is also a component of the CRB Index, has languished below $40 for most of the new year. Given the precarious nature of global supplies (yes we still have a production deficit globally), oil is one area where banks might choose to deploy their newly found bailout wealth. The fact that the Euro/WTIC ‘peg’ recently ended elevates the probability of this eventuality an order of magnitude of at least several times what it was while the ‘peg’ was still in place.

WTIC Chart

While it is my opinion that we have seen the inflection point, it is still an unconfirmed opinion at this point. The three factors pointed out above along with many other metrics we monitor on a daily basis will aid in either confirming or denying that such an inflection has in fact occurred, and more importantly what to do about it from a capital management perspective.

Clearly it was easy to sit on the sidelines of the equity markets for the second half of last year with little worry of wealth coming under attack by inflation. If in fact we have seen this paradigm shift, however, then it is going to be a very dangerous time ahead. Returns in excess of taxes and inflation will again come to the forefront and the obvious question is where to go? Equity markets are at the very least unstable and that is being rather kind. The good news in this regard is that we have been able to find and report many solutions to our clients and subscribers. Solutions that have passed the tests of 2008 with flying colors while also providing for the inflationary times that I feel lie directly ahead of us. Clearly this is not a time to throw in the towel, but to dig in our heels and prepare to fight another battle for our purchasing power.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.suttonfinance.net.

Disclosures: Long GDX

Another Hit and Run

by TwoCentsEditor

Published on: 02/13/2009

Categories: Current Events

Comments: 12 Comments

In eerily similar fashion to last fall’s financial system bailout, the American people are once again having another piece of legislation jammed down their throats without their elected representatives even having a chance to review it. This by a new administration; one that promised that such things were of the past. However, when it comes to pork, all politicians are the same and this new stimulus bill has now grown to well over 1000 pages in the hours before the final vote.

The bigger question is how could an elected representative in good conscience vote for something they haven’t even had a chance to look at? At the very least, this is despicable behavior. This bill of goods has been sold under the premise that if something isn’t done within days that the economy will collapse. This is utter nonsense and fear-mongering – nothing more. An economy doesn’t collapse over a period of days. It has taken us well over 2 years from the beginning of the blowup just to get to where we are now. Certainly a few weeks could be taken here to at least give due diligence before committing the equivalent of fiscal suicide.

Unfortunately, by the time we actually learn about the content of this ever-changing bill, and its ultimate impact on us as citizens, the time for action will be long gone.

A response to Senator Arlen Specter

by TwoCentsEditor

Published on: 02/10/2009

Categories: Current Events, Economics

Comments: 1 Comment

Like many Pennsylvanians, I have been less than thrilled by the representation of Senator Arlen Specter. This dissatisfaction reached a Zenith today as Sen. Specter was one of the 61 Senators that voted for the pork-filled economic ‘stimulus’ package. I’d like to take Senator Specter’s op-ed piece from the Washington Post and provide some in-line reactions (bolded)

“I am supporting the economic stimulus package for one simple reason: The country cannot afford not to take action.

Agreed 100%, Senator. Unfortunately, taking an opportunity to create lasting, sensible solutions is much different than going in with a half-baked, half-compromised plan and hoping it will keep things glued together a few months. I might remind you of the $168 Billion cure-all stimulus from early 2008. At the time the Congress was convinced that action would fix everything. Now the same Congress is convinced that nearly a trillion will be enough. Not to mention nearly another $10 Trillion in pledges, guarantees, and bailouts that have been thrown at this collapse between Stimulus I and Stimulus II. At the very least, the Congress should be willing to admit that it has no idea of the ultimate final cost of this problem. I will guarantee you this much though – it is a lot more than $10 Trillion.

The unemployment figures announced Friday, the latest earnings reports and the continuing crisis in banking make it clear that failure to act will leave the United States facing a far deeper crisis in three or six months. By then the cost of action will be much greater — or it may be too late.

This will be the case no matter if this bill becomes law or not. That is because this bill is not addressing the real problem. It doesn’t address the fact that our economy is based on debt, and needs that debt to grow. Without continued debt accumulation, we have no economic growth. Simple as that. That is why it will be necessary for Congress to continue bailing out failed firms and passing stimulus packages. This package will stimulate consumption for a time, but that is it. It will not, nor does it have any prospects for stimulating the economy. If you want this measure to be effective, dedicate 100% of it to rebuilding our lost manufacturing base. Create products here. I know this violates the tenets of globalism and free trade, but it is the only solution. Unless you want to be writing the same arguments for stimulus III in 6 months or so.

Wave after wave of bad economic news has created its own psychology of fear and lowered expectations. As in the old Movietone News, the eyes and ears of the world are upon the United States. Failure to act would be devastating not just for Wall Street and Main Street but for much of the rest of the world, which is looking to our country for leadership in this crisis.

Our country has been the ‘leader’ in the world economy because both our people and our government have expressed a willingness to borrow money to consume. We have done so even to the point of our own detriment, and now decades of borrowing constitute a boat anchor on future growth. Yesterday evening, the President stated that the government was the only institution remaining with the resources to combat this problem. What resources? The government has no resources; other than the ability to borrow (at the expense of the People), create money from nothing (at the expense of the People), and pledge future economic growth to paper over current problems (at the expense of the People). The government doesn’t have $780let alone $780 Billion.

The legislation known as the “moderates” bill, hammered out over two days by Sens. Susan Collins, Ben Nelson, Joe Lieberman and myself, preserves the job-creating and tax relief goals of President Obama’s stimulus plan while cutting less-essential provisions — many of them worthy in themselves — that are better left to the regular appropriations process.

Our $780 billion bill would save or create up to 4 million jobs, helping to offset the loss of 3.6 million jobs since December 2007. The bill cuts some $110 billion from the $890 billion Senate version, which would actually be $940 billion if floor amendments for tax credits on home and car purchases and money for the National Institutes of Health are retained.

Nowhere has anyone actually demonstrated where these 4 million jobs would be created other than the desire to hire nearly 600,000 more government workers. It is very likely that the business community is aware that this will not work and will therefore seek to conduct whatever business the stimulus allows without actually expanding staff to the extent expected. This is not a ‘business as usual’ environment. If the private sector really had faith in this package, it wouldn’t continue to cut jobs as it has been. It would hang on and wait, understanding that retention is far more cost-effective in the short run than going through the hiring cycle. The private sector’s actions alone are a vote of no confidence with regard to government stimulus.

House Speaker Nancy Pelosi says the proposed cuts “do violence to what we are trying to do for the future,” especially on education. Her objections are a warning to conservatives that more cuts would be unlikely to win House approval. They are also an admission of the high price that moderates have been able to extract for their support of stimulus legislation.

If a stimulus bill doesn’t pass, there won’t be any money for Title I education programs. The moderates’ bill provides marginally less money for Title I than the House and Senate bills. But while it’s less than supporters want, this proverbial half a loaf beats no loaf by a mile.

Title I existed long before the stimulus. Education is one of the few areas that have actually seen growth over the past year in terms of employment ex-stimulus! How will Title I spending stimulate the economy?

In health funding, both the House and Senate bills contain billions of dollars for wellness and prevention programs, including for smoking cessation, prenatal screening and counseling, education, and immunization. The moderates’ bill, regrettably but necessarily, cancels this funding on the grounds that such programs are better left to the regular appropriations process.

Same point as above – how is any of this going to stimulate the economy? This is one of the portions of the bill which has been totally dedicated to the political pandering necessary to get the votes needed for passage. While on the surface, all of these initiatives sound warm and fuzzy, they will not stimulate anything other than perhaps the national debt.

“In politics,” John Kennedy used to say, “nobody gets everything, nobody gets nothing and everybody gets something.” My colleagues and I have tried to balance the concerns of both left and right with the need to act quickly for the sake of our country. The moderates’ compromise, which faces a cloture vote today, is the only bill with a reasonable chance of passage in the Senate.”

As Thomas Jefferson so eloquently put it, “A government big enough to give you anything you want is also strong enough to take everything you have”. This bill seems to be little more than a government stimulus package. It will do very little for the economy or the real root causes of the problem: debt and a broken monetary system.

And the numbers keep growing

by TwoCentsEditor

Published on: 02/09/2009

Categories: Current Events, Economics

Comments: No Comments

What started out about this time last year as a $168 Billion attempt to revive us from a recession that at the time didn’t even exist (according to Washington and the media) has grown into a mammoth rescue which to date commits US taxpayers and future generations to nearly 58 times that original amount.

This amount is enough to pay off nearly 90% of US mortgages according to Bloomberg. Has anyone ever thought that it might not be a bad idea to do exactly that? Since we’re going to spend this money on consumption anyway, it makes sense to maybe relieve the average American of a little financial strife.

Let’s extend that for a second to all the bad debt floating around the financial system. Debt that the government is frantically trying to figure out what do with. Did it ever occur to anyone to ask why some of those debts are bad? Sure, a good portion of it is due to derivatives and other bets, but at the very least some of it is consumer debts that cannot be paid because of job losses, irresponsibility, variable rates, etc. Helping the consumer would help the system by making at least some of these debts manageable.

It becomes important to understand the differences between consumption and an economy. Anyone can consume. Demand is virtually unlimited. Given someone a boatload of money and they’ll probably end up buying much more than a boat. Even under the best of conditions this would be foolish because it incentivizes laziness. However, in our current model, it does virtually nothing since a good majority of our products are manufactured overseas anyway. So borrowing and spending a trillion dollars might cause a bit of temporary consumption, but do little to sustain an economy.

If we’re going to do a bailout anyway, again, why not start with consumers and rebuilding our productive capacity.

Twelve Zeros Worth of Protectionism

by TwoCentsEditor

Published on: 02/06/2009

Categories: Economics, My Two Cents

Comments: No Comments

Protectionism has clearly become a dirty word. Unfortunately, those in the position of dispensing awareness and perspective obviously have no idea what true protectionism is. If it were explained properly, I would venture to imagine that most here in America would be in favor of it. After all, it applies directly to us and our standard of living.

In the 1990s globalization was presented to the nations of the world. Terms like competitive and comparative advantage became part of business lore. Americans, already punch drunk from a 25-year assault on the purchasing power of their currency, were sold on the promise of inexpensive imported goods. These goods would be made elsewhere and moved on barges powered by oil that would be cheap forever. While the former was certainly true, the costs of such shortsighted thinking were largely ignored by those in Washington. We are now witnessing the effects of those costs firsthand.

“We cannot afford a trade war”

This week, Senator John McCain proposed an amendment to the pork-laden ‘stimulus’ package that would have effectively wiped out the ‘Buy American’ clause in the package. Essentially this clause stated that any government or public building projects had to use steel that was produced in the United States. Having already lived through the obliteration of this iconic industry once, the ‘Buy American’ clause was very encouraging. However, it appears that in this regard, it will be business as usual, maybe not because we want to, but now because we have to.

To put it simply, America can no longer live on its own production. This is no surprise and has been the case for quite some time. However, we are in a position now where a little leverage might come in handy. Our economy is bleeding jobs and we need to be able to maintain and promote American manufacturing. And contrary to the tenets of globalization, there is absolutely nothing wrong with producing our own goods and services and we should be doing exactly that.

While the argument will be made that our trade partners cannot afford not to trade with us, it is much more likely that they can remain solvent far in excess of our ability to sustain ourselves. This is particularly true in the case of energy, the ultimate staple good. Despite the claims of many that we have enough oil right here in the US to last us umpteen years, even if that were true, you don’t just flip a switch and have oil flowing. History should have taught us that much. It takes years in many cases to raise these products, build a transport and distribution network and get them into the economy. Again, we have no leverage.

And in reality, why do these countries need to trade with us anyway? Much of what they get in return is nothing more than IOU’s on fancy paper.

The chart below illustrates our trade gap in terms of actual goods – goods we either aren’t able to or currently do not produce ourselves.

US Trade Statistics (Goods only – in Billions of Dollars)

Year*	Exports	Imports	Balance
2007	1,148,481	1,967,853	(819,373)
2006	1,023,109	1,861,380	(838,270)
2005	894,631	1,681,780	(787,149)
2004	807,516	1,477,094	(669,578)

*2008 Final Data Available on 2/11/2009

In typical lukewarm fashion, the US Senate shot down McCain’s amendment in it’s version of what is likely to become a $3 trillion pork-barrel spending package in the coming weeks. For those who are counting, that is $3,000,000,000,000. However, what was most telling is that the balance of the Senate has no respect for American jobs or industry either. This was evidenced by the addition of a proviso that no existing trade agreements be violated by the bill.

This is what happens when you’re behind the eight ball. You have no leverage and little flexibility. In the case of trade, it is doubtful that we can even talk tough let alone back it up with substantial action.

‘Free Trade’ agreements and the Lowest Common Denominator

Another spin off of free trade agreements such as NAFTA is that in addition to driving our jobs overseas, they created a lowest common denominator situation where wages in developed nations came under downward pressure. The causal relationship is simple to illustrate. If a company can make something in Taiwan for example where GDP per capita is about 1/3 that of the US (Economist World in Figures 2007), then import the goods back into the US, the consumer will benefit from the cheaper good. Unfortunately, for every benefit, there is an equal and opposite detriment, and in this case, the jobs in the US which used to produce that good no longer exist. This is what has happened over the past 25 years or so. We chose instead to focus on a service economy where we basically shuffled papers and intangible goods amongst ourselves and called it an economy. All the while, we racked up massive external debts to buy the real goods we needed to survive.

I will allow that obviously this transformation has not been total. There are still some thriving industries in the US, but rather, I am referring to the net effect of the past 2 and one half decades. Much of the wage gap has been filled with various types of consumer credit whether it is credit cards or, more recently mortgage equity withdrawals. Obviously, as we have seen in dramatic fashion, these levels of debt accumulation proved to be as unsustainable as the dynamics that necessitated the accumulation in the first place.

The Solution?

While we have been showered with announcements that our trade deficit is improving, it must be noted that this is almost entirely due to the liquidation of 2008 (which crashed commodity prices) and the US-led global recession. Were growth to return to normal levels, we would immediately observe the trade deficit returning to its prior trajectory. By way of extension, the same situation exists in the case of the US Dollar. Fundamentally, nothing has changed. Media outlets and pundits alike are reading false signals created by the distortions of a debt-laden, fiat monetary system. It is something along the lines of going to an 80s movie where 3D glasses were necessary to make sense of anything. Only the guy at the door forgot to give them a pair.

For quite some time now this commentary has been a soapbox for the idea that we need to rekindle our productive economy. Never has that been truer than right now. We tried the globalization experiment, and in my opinion, it has been a dismal failure. Sure we got some cheap goods, but as a country, we’ve become dependent on others for our very sustenance. This is not an enviable position for anyone to be in, especially not for a country that wants to call itself an economic superpower.

That said the upcoming stimulus package could be used help return America to her pre-1980s position of industrial superiority. During the late 1800s and early 1900s, we ran large trade deficits and put them to work building an industrial base that was second to none. We have a chance to use the debt that will be incurred regardless for something productive. Simply handing people checks so they can go buy television sets (thereby sending the money to Asia) is not going to help anything. Rewarding zombie banks for past financial transgressions will not help anything. Taking the ‘stimulus’ and building industrial capacity, creating real jobs, and producing high quality products, however, would be a nice start.

Get a copy of Sutton & Associates’ free report – “The 7 Mistakes Investors Make…and how to avoid them” by clicking here

Disclosures: None

Income in a Zero-Rate World

by TwoCentsEditor

Published on: 01/30/2009

Categories: Economics, Financial Markets, My Two Cents

Comments: 1 Comment

One look at the yields on US Treasuries tells a good part of the story. Listening to Fed Chief Ben Bernanke gives us the rest: it is going to be very hard making any kind of money in many traditional fixed income instruments using the conventional method of clipping bond coupons. Certificates of Deposit won’t be much better moving forward. It would seem as though we are destined for either zero or near zero short-term interest rates for at least the next year.

At the same time, equity markets have been atrocious. That goes without saying. And it hasn’t just been the US markets either. International indexes have been decimated. Commodities, save Gold, have been hammered as well. There are always FOREX markets, trading options, and futures, but they are risky and often outside the comfort zone of the average investor. So the big question right now is how does one aspire to make any money in the markets given the current realities? Fortunately, there are a couple of strategies that are relatively easy to implement for the average investor. We’ll outline two of them here.

The hedged dividend Portfolio Model

The first is to create a situation where the investor is able to secure a higher rate of dividend income than that of traditional fixed income investments while significantly decreasing the risk to the portfolio. In order to do this, a portfolio of dividend paying assets is selected, and an appropriate hedge is identified to protect the investment. This allows the investor to get a comparatively high dividend yield while providing a higher degree of capital preservation than would otherwise be possible.

The problem with hedges is that markets don’t always go down, nor do they always go up. Obviously, when markets are moving higher a hedge will be a boat anchor on any portfolio. Conversely, the absence of a hedge in a falling market will also be a boat anchor. The challenge is identifying the bigger moves and acting accordingly.

Back in December, we took at a look at some model portfolios that were based on the investment themes focused on by the financial media during 2008. Of the three, let’s focus in on the energy portfolio, simply because it paid the best dividends of the three mentioned in that article:

Security	Symbol	5/19/2008 Price	11/20/2008 Price
Penn West Energy Trust	PWE	$33.83	$12.42
PenGrowth Energy Trust	PGH	$20.84	$7.84
Baytex Energy Trust	BTE	$29.20	$12.09
Harvest Energy Trust	HTE	$25.52	$9.20
Schlumberger	SLB	$106.63	$40.02
Permian Basin Royalty Trust	PBT	$24.74	$16.27
Kinder Morgan	KMP	$60.22	$45.37
Buckeye Partners	BPT	$49.11	$27.77
Ultrashort Oil&Gas ETF	DUG	$26.69	$49.57

This model contains 4 Canadian Royalty Trusts, an oil service company, two Master Limited Partnerships (MLP’s), and an express Trust. The model is heavy on the side of Canadian Royalty Trusts because they have been a popular vehicle for individuals to invest in oil and natural gas.

This model portfolio paid $19.98/share in dividends during the course of the period studied.
The assumption for the portfolio is that an equal number of shares were purchased for each issue listed. Let’s say for example that we purchased a round lot (100 shares) of each and a 16% hedge (250 shares) of DUG.

The initial cost of our portfolio on 5/19/08 (recent market high) would have been $41,681.50 plus any applicable commissions. The November 11/20/08 value (recent market low) was $29,490.50 for a loss of $12,191.00 or 29.25%. The dividends paid during that time would have totaled $1,998.00, a yield of 4.79% for just 6 months. Considering the S&P500 lost 47.25% during the same period, the hedged strategy performed much better and produced dividends at an annual rate of 9.58% as well.

Obviously, if the price of oil and natural gas had continued to rise, this would not have been an appropriate move since we would likely have gotten capital appreciation in additional to the dividends but the hedge would have lost significant value. The obvious risk to this type of an approach is that the incorrect hedge is used or a major market signal is missed. The whipsaw of the energy markets underscores the need to be up on the wheel in terms of keeping up with this type of a strategy. While it can certainly pay off, like anything else, it requires constant vigilance. The benefits are obviously the dividends and the knowledge that even if you don’t nail every move; you are still getting paid handsomely to wait until market conditions become favorable. And in the case of energy, you have the conviction of the belief that you are investing in a wasting asset that is becoming more and more difficult to get to market.

Income through covered calls

A second method that investors can use to make money on investments they hold is by writing covered calls. It isn’t as complicated as it sounds. In the interests of brevity, I will present a short primer of how an option works, focusing on calls for the purposes of this article.

A call gives the holder the right to purchase 100 shares of a stock at a given price, or ‘strike price’ for a period of time. For this option, the purchaser pays a premium. Let’s use an example to illustrate. Joe buys a call for Company XYZ at a strike price of $30 that expires in 3 months. The current share price is $28. Joe is speculating that the price of the stock will go up within the next 3 months. If indeed that happens, he can either sell his option to someone else (if it appreciates in value) or, if the price of the shares goes above $30, he can exercise his option, purchase the shares at $30 then sell them on the market for a profit. However, if the share price doesn’t move or goes down, Joe’s option will expire worthless.

Now let’s flip the roles and look at it from the standpoint of the investor who holds the shares. Let’s say that Joe buys 500 shares of XYZ stock at $28/share. What he can do is sell 5 calls (each call is an option on 100 shares) at a strike price of say $35. For selling these options, he’ll receive the premium, which will vary on a number of items such as the volume of options at that date and strike price, the time involved, and other factors.

Joe’s calls are ‘covered’ because he already owns the shares. If the option is exercised, he’ll just surrender his own shares as opposed to having to go out in the market and purchase them (naked call).

In the ‘worst’ case, the stock price rises to the point where the option holder will exercise and Joe will have to sell his $500 shares at $35/share. However, he not only received the premium from selling the options, but he also made $7/share. So his profit is $3,500 plus whatever he made selling the options. If the stock stays under $35, the option will expire unexercised and Joe can sell 5 more covered calls and bring in more premium. For stocks that are stuck in a range, this is a great strategy. Applying this strategy to a dividend-paying portfolio is a great way to enhance income, especially in a down market such as what we are dealing with right now. By combining this tactic with the hedged portfolio presented in the previous example, a fairly stable basket of dividend producing assets with extra income from the covered calls can be created.

Some things to consider

• It is a good idea to sell calls at a strike price that is significantly above what was paid for the shares. The example above is a reasonable one. If the strike price is too close to the current market price, you stand a better chance of getting blown out of your position. You’ll likely bring in more in premium for those options, but the likelihood of losing your position must be weighed. This is especially true if the intent is to collect dividends and supplement the dividend income with covered calls.

• Tax implications must also be considered. Generally for IRA type accounts this is not an issue as all taxes are deferred anyway. However, in the case of an individual taxable account, Joe’s $2,500 gain would be taxed as a capital gain. The amount of time Joe held his shares would determine whether he’d pay the short or long term rate.

• Writing uncovered or naked calls is not generally advisable and is typically more risky because the writer of the naked call has to have the money available to purchase the shares to sell should the option be exercised. For an investor who is looking to augment dividend income, writing naked calls is probably not a great idea.

If there is one silver lining to the current zero-rate environment, it is that consumer prices have not gone ballistic at the same time. The reduction in energy costs have helped consumers immensely and slightly lessened the need for inflation fighting 10-15% returns (see table below).

Observed Inflation Rate	Tax Bracket	Return required to break even
5%	28%	6.94%
7%	28%	7.92%
10%	28%	13.89%

However, by seeking out these types of returns anyway, investors can begin to either recoup some of what they lost in 2008 or prepare for a future that is at best unclear. Based on recent money supply figures, the assumption that we will once again be entering a period of high inflation is a pretty good one.

Perhaps the most important take home message from this article is that when you buy a stock you become an equity owner in that firm. And it is my belief that equity owners should share in the profits of the firm rather than resting their success solely on the hope that someone will come along at some point in the future and give them more for their shares than they paid.

It must be noted that these strategies are not suitable for every investor. The model portfolio in this article is used for informative and illustrative purposes only and should not be taken as an investment recommendation or offer to buy or sell any security. Always consult a qualified financial professional before making any investment decisions.

Disclosures: Long PWE, HTE

A Bailout Letter from "We the People"

by TwoCentsEditor

Published on: 01/28/2009

Categories: Current Events, Economics

Tags: bailout, Barney Frank, Biden, business, commodities, democrat, Economics, economy, finance, financial crisis, financial system, Geithner, obama, politics, republican, stocks, washington

Comments: 2 Comments

Dear Elected Representatives,

In the coming days you will be faced with a decision. Once again, fear will be instilled in you, this time by a different group of faces. You will be told that if you do not act that our economy will collapse with all blame solely laid at your feet. You might even be told that martial law will result if you don’t pass the next stimulus and bailout bill.

This time you don’t have the distraction of a coming election. Nor do you need to worry about pandering. The American political memory is pitifully short, and there are almost two years before the next elections. So you can act in confidence and principality without having to worry about keeping your job. Such a sad state of affairs we have in America.

Let’s take a look at the last failure of government intervention. On October 3rd, you authorized over $800 billion in taxpayer dollars (which had to be borrowed) to save the financial system. It has been an abysmal failure. You’ve succeeded in doing little more than creating a giant financial parasite. A parasite that will require more and more resources going forward while producing nothing but a drain on the efforts of future generations.

Even worse, since October 3rd, the unaccountable Federal Reserve has created tens of trillions more behind closed doors, pinning the bill on the forehead of your constituents with nary a whimper of protest from the Congress. This reality is not indicative of the Republic our Constitution demands, nor is it acceptable as a means of government.

The net effect of the bill that will be put before you will be to increase the burden of government on the American people. When will you learn that the markets do a better job of allocating resources than government? When will you learn to stop rewarding irresponsible behavior? I credit you with having the intellect to figure out that when you subsidize bad behavior that you guarantee more of the same. Bank of America needed to fail. Citigroup needed to fail, AIG needed to fail. And the list goes on. Now they sit like an albatross upon the productive output of our already fragile economy. How do you expect our economy to recover when you continue to pile dead weight on top of it? Despite the fancy verbiage that you’re likely to include in your terribly scripted reply to this letter, that is exactly what you’re doing.

It is time for the bailouts to stop and for responsibility and accountability to begin. It starts with you. You are paid a handsome salary and lavish benefits package (far better than anything your constituents receive) to represent them. Slamming them with debt obligations while telling them you’re fighting for them is a bald-faced lie. I would like to know by way of a personal reply that you’re going to stand with the American people in this crisis – not with big banks, Wall Street, the unaccountable Federal Reserve, and the status quo.

Respectfully,

“We the People”

We encourage the general public to use any or parts of this text as they consider contacting their representatives about this latest egregioous breach of responsibilty to the American people.

Three Bears and a missing Goldilocks

by TwoCentsEditor

Published on: 01/23/2009

Categories: Current Events, Economics, My Two Cents

Tags: business, commodities, economy, finance, government, great depression, media, money, news, politics, press, recession, stocks, Wall Street

Comments: 1 Comment

2006 and 2007 were framed by financial pundits as a time when we could truly have the Goldilocks economy. Growth wouldn’t be too fast or too slow, but just right. The Fed had both hands on the wheel and was goosing things just enough to keep the ship headed in the right direction. Of course all the while the same pundits chose to ignore raging inflation at the consumer level as energy and food prices headed for the stratosphere. The fall of energy prices has been spectacular, however, the drop in food prices has been virtually nonexistent. As in the story of Goldilocks, there were some bears who weren’t too happy about Goldilocks and her plans for their porridge.

2008 was the year of the bear in many regards, but as we take a deeper look at the situation, it becomes very clear that there are several other angry bears out there that have yet to completely show themselves. The credit crisis, as many in financial circles affectionately call it, has been improperly blamed for the current economic malaise. In order to understand this concept, it is imperative that one be able to separate the financial economy from the real economy. The real (or producing) economy is the part that actually creates goods and services which are allocated by the markets, often with the use of credit from financial intermediaries. Those intermediaries make responsible loans based on a number of factors and intend to collect payments for the duration of the loan. Despite what we’ve been led to believe about securitization, a good deal of non-securitized lending was going on as well. This is the real economy. The financial economy is behemoth firms on Wall Street, which by and large produce almost nothing (except headaches recently).

This was not always the case. An economy does need financial intermediaries. Essentially what these intermediaries are supposed to accomplish is to bring savers and borrowers together in an efficient manner and take advantage of scale economies. For example, it is easier for a company to go to a bank for a million dollar loan rather than put ads in newspapers and solicit the loan a thousand dollars at a time. Likewise is it easier for someone who wants to save $1000 to head to their local bank than it is for them to seek out a borrower directly. In this both these cases, the financial agent or intermediary provides a valuable service by adding efficiency to the process. For this service, the agent is paid a fee. That fee comes from the difference between the interest paid and the interest collected (the spread). Unfortunately, what has happened is the financial intermediaries have been engaging in other activities such as underwriting, trading for their own accounts (Wiki Glass-Steagall) as in the case of broker dealers, and providing investment advisory services, often times recommending stocks which they themselves own or have provided underwriting services for. Lastly, and perhaps most dangerously, the use of leverage and super leverage became commonplace. The largest financial intermediaries dabbled too much in the conflict of interest and risk business rather than tending to their role in the system.

The Baby Bear has been the understanding that all of this would go well until the sea changed and the market moved against these intermediaries. This sea change, triggered by a strikingly small number of defaults on subprime mortgages and the avalanche of credit derivatives that followed has left a swath of destruction that has rendered our most venerable firms insolvent. What was Wall Street is now a giant zombie, requiring constant, ever-increasing, and ever-accelerating mountains of money just to keep it functioning. This is borne out in the news headlines as AIG, Citigroup, and Bank of America in particular have required steady infusions of cash. Not to mention the GSE’s Fannie Mae and Freddie Mac. The above scenario is a pure example of the downside of leverage. If someone takes $100 and borrows $900 to make a $1000 investment and that investment loses 11%, the capital is gone. What is left is an underwater investment and no way to make good AND remain solvent. In many cases we witnessed leverage rates of 20, 40, and even 100 to 1. In these cases, miniscule market moves led to instant insolvency hence the ability of a small number of bad loans to trigger the crisis. (See chart below for an idea of how credit in the financial system has been growing over the past half century.)

Total Credit Owed - Financial Sector

(Total Credit marked debt owed by the financial sector – an indirect indicator of leverage)

However, were the defaults on those subprime mortgages caused by the credit crisis? Absolutely not. They were caused by the Mother Bear: overleveraged consumers. The ridiculous notion put forth by the media and financial pundits that real estate prices could accelerate forever was prima facie evidence of a bubble. What these pundits failed to recognize is that in any debt structure, there is an absolute point where it is simply not possible to take on more debt because expectations for even the servicing of that debt are simply unreasonable. To put it simply, what were the prospects for the now famous California strawberry picker to make continually increasing payments on a $750,000 condo? Silm and none and Slim’s bags were packed before the ink was dry on the loan.

Unfortunately, it was not just housing; it was everything. A recession was avoided in 2001 by dropping interest rates to nothing, printing money, and blowing bubbles. We bought too many cars, too many computers, too much consumer electronics, too many swimming pools, too many granite countertops, and in general, too much of everything. Not until it was too late did we realize that we were saving nothing, spending well in excess of our means, and now the bill is coming due. Buying less was an obvious move on the part of consumers, and is in full swing. This pullback in spending is now rippling through both the manufacturing and service economies of the US and other OECD countries. This morning, the UK officially entered a recession although I’d venture to guess that, like us, they’ve been there for quite some time. China’s output is falling as we (and others) consume fewer of their goods.

The Father Bear is time. Consider for a moment the trillions of dollars that have been thrown at just the banking system. These trillions have not fostered one iota of growth. They have barely unlocked the credit markets with regard to banks. The LIBOR Rate chart has more gaps on it than someone in dire need of an orthodontist, and the banking system requires unknown further trillions just to maintain a semblance of financial order.

1 Month LIBOR

(1-Month London Interbank Offer Rate (LIBOR) on a weekly basis)

All of this, and nothing has been done about the economy. And I’ve got news for the pundits – this will not go away by printing more money. This will not go away by lowering rates, which are already at zero in the US. This will not go away by handing out gift cards to consumers to force them to buy stuff (Suggested in 1/8’s MTC article as a possible ‘solution’ and mainstreamed by MarketWatch on 1/22). Creating more government jobs is not the answer. What has been lost in the analysis of the Great Depression is that despite FDR’s New Deal programs, the US remained in a depression for another 7 years at a minimum. The country was pulled out of that depression by the onset and eventual entrance of America into World War II, NOT by government spending programs alone. This does not bode well geopolitically.

The take home message is don’t expect this to end quickly. It will not. The Depression of 2008 and beyond is here, no matter what we choose to call it. Every week over one half million freshly unemployed individuals are filing for unemployment insurance. Sure that insurance helps them to stay in houses and buy necessities. That’s about it though. I would not count on these people running up credit card debt to over-consume. So every week, one half million discretionary spenders are heading to the sidelines. This is a crisis of consumption, brought on by decades of overconsumption, facilitated first by sending a second wage earner to the workforce, and later by the introduction and rampant growth of consumer credit. These excesses were not created overnight, nor will they be purged overnight.

01/22/2009 Initial Claims

(New Unemployment Claims – weekly in gray, 4-week mean in brown)

Total Consumer Credit Outstanding

(Total Consumer Credit in 2000 Dollars with y/y %change in red)

What is also going to become very obvious in the next 9-12 months is that inflation is a monetary, not an economic event. We have been riddled with talk from the financial press that prices cannot rise while the economy is weak so we should forget about inflation. They will be proven wrong. A growing economy actually causes prices to fall by creating efficiencies through scale and scope economies. Prices are much more a function of money supply than economic velocity or activity. Watch what happens to prices if the government starts handing out money or gift cards. Do you think flatscreen TV’s will sell for 50% off if those TV’s are flying off the shelves because you’ve got 300 million Americans armed with a Victory Card? I think not. Prices are a function of the supply of money and credit. The bad news here is that you can have inflation during a depression. Care for a recent example? Just go back to the 70’s stagflation. What we’ve got now is just a more extreme version of an already established event.

What do to? Believe it or not, there are sectors, industries and firms that will do exceedingly well in this type of an environment. They’re out there and we’ve been pointing them out to our subscribers and clients. Perhaps most importantly though, at a micro level, each person can clean up their own finances and temper their expectations of the future to whatever extent is possible. And if you happen to see Goldilocks, tell her to drop Ben a line; he’s been looking for her for quite some time and is rather worried.

DISCLOSURES: Long MERKX, DOG

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