Friday, December 30, 2011

“Predictions – An Exercise in Futility”

Sydney M. Williams

Thought of the Day
“Predictions – An Exercise in Futility”
December 30, 2011

Attempts to predict the future conjure images like Shakespeare’s witches, who at least were endowed with such abilities; palm readers, hiding behind mysterious curtains; and old women, doped up and dressed in long flowered gowns gazing into murky crystal balls. Pretending to do so seriously is both arrogant and foolish – arrogant because it presupposes a nonexistent ability and foolish because it has little better than a 50-50 chance of success.

However, it being year-end, being both foolish and arrogant, and recognizing that the following predictions will be more entertaining than informative, here goes:

     1) President Obama will lose his bid for re-election. Mr. Obama has the advantage of being an incumbent. He is the favorite of the mainstream press and is expected to substantially outspend his Republican opponent. However, economic performance is the most important determinant of elections, and the economy, while gradually improving, will remain sluggish, with unemployment too high to help. Additionally, voters are increasingly concerned that the President’s policies have placed the country on a path toward Socialism. Despite denials of Left Wingers, the Tea Party is more representative of Middle America than the “Occupiers.”

     2) Mitt Romney will become the Republican nominee, and he will do so earlier than generally expected. This is principally because, with the exception of Jon Huntsman, he has been competing against a bunch of nuts, as the last few weeks in Iowa have made clear. Mr. Romney comes across as a sincere, capable, if unexciting man. He is neither arrogant nor overconfident like Barack Obama, and he is neither incompetent nor ignorant like Joe Biden. Of course, as a Presidential candidate, Mr. Romney, a Mormon from Massachusetts, will have to overcome the political dirty tricks that come so naturally to a Chicago politician, but he should prevail.

     3) Demonstrating that countries, like people, are more adaptable than experts believe. By the end of 2012 at least one country (probably Greece) will have left the Euro Zone without devastating consequences. However, Europe will continue to subsist amid a morass of indecision and decline. Difficult choices – like living within one’s means – will be avoided by those in countries along the Mediterranean, while northern states will insist on draconian budgets that will impede recovery.

     4) The U.S. economy should gradually improve. The drag will be the consumer who spent more in 2011 than many expected, but at a pace that cannot be sustained in 2012. Once again, savings are declining and borrowings are increasing. Helping the economy should be a gradual, but continued improvement in housing construction – off of a very low base – and exports, assuming Congress and the Administration avoid a trade war.

     5) Concerns about unsustainable budget deficits will result in battles over cuts in entitlements versus cuts in defense. This will cause the country to lean increasingly toward isolationism, especially in matters of our military. Todd Purdam, in a Vanity Fair article entitled “One Nation, Under Arms”, writes seductively of the attractions of returning to a pre-World War II era when the United States was not a policeman to the world. As attractive as such a prospect is, one can’t go back. We live in the world as it is. Nevertheless, expect such notions to gain credibility.

     6) Commodity prices, after peaking around mid-year, have come down precipitously with the CBOE Index peaking in early March at 99.22. It has since declined 16.5%. Gold and oil are both up on the year, but both down from their highs, with gold down almost 18%. Those declines have been reflected in the stock markets of Australia and Canada, lower respectively by 15.7% and 15.5% in 2011. In 2012, strengthening global economies and inflation concerns should lift commodity prices.

     7) The Dollar may continue to show strength, at least in the early months, but a heavy federal debt load and the printing of money ensures a continuing depreciating Dollar over the longer term. Public policy and a too-loose Fed have caused gradual Dollar devaluation over many years. If I were not so polite I would say our elected and appointed representatives in Washington have “trashed” the Dollar. Its recent strength may persist, but nobody should take comfort that its strength derives from a positive view of more responsibility in Washington, or a more vigilant Fed. It is simply an indication that much of the developed world is in a worse mess than are we.

     8) An economy that gradually improves and rising commodity prices will bring an end to the thirty-year bull market in bonds. To find the greatest excess within the financial asset category, one has to look no further than the piteous yield on U.S Treasuries, especially when the supply is increasing at historic rates.

     9) Based on a guess (and a hope) that the President loses the election, I predict a modest rise in the market for 2012. While stocks are lower than they were four years and twelve years ago, only one year in the past nine has been down – 2008, though this year will be close. Expect stocks to do modestly better, with most of the gains coming in the second half. It is generally believed that large-cap, dividend paying stocks with a global franchise have become the venue of choice for financial asset investors; thus, the pros conclude, such equities are no longer attractive. That may be the case, but it seems to me that neither their multiples nor their yields indicate excessive exuberance.

My best advice for 2012 is to stay healthy and make the most of each day, keeping in mind that every hour that passes is one that is gone forever. Each one of us will have opportunities for success and for failure, and it pays to know the difference. It behooves us to be adaptable and accepting of change, the one constant in our lives. Life is a gift to be savored and enjoyed. My best wishes for a Healthy and Happy New Year!

Thursday, December 29, 2011

“The Myth of the One Percent”

Sydney M. Williams

Thought of the Day
“The Myth of the One Percent”
December 29, 2011

Targeting the one percent is seen by Democrat’s as a surefire way of retaining the White House. Dividing the electorate is an age-old tactic, derived from the military. Divide and conquer has been used in warfare, since time immemorial. It is a means of overpowering an enemy larger than one’s own by driving a wedge between their forces. The term comes from the Latin, “divide et impera.” In his book, Travels with Charlie, John Steinbeck wrote that we all need someone to hate. It helps bind the rest of us. Class Warfare is a means to divide the nation. For the President it serves to cover-up his failed economic policies.

Like any organization, Occupiers of Wall Street (OWS) rely on slogans. “We are the ninety-nine percent’ implies that the vast majority of people have been set upon by the greedy and unscrupulous. It was a maneuver designed to attract political backing. What politician would prefer to be associated with the one percent?

Occupy Wall Street began with a few young people claiming that their suffering was due to the one percent who, over the past several years, had gathered all the wealth and most of the income. They determined that Wall Street greed brought our financial system to near collapse three years ago. Left wing politicians saw the movement as an antidote to the Tea Party, despite their obvious differences. The Tea Party was a spontaneous uprising of middle class people who felt increasingly alienated from a government that had become too big. They were older, responsible and respective. Not so the “Occupiers.” Their cause was assumed by unions and others for their own purpose. The “Occupiers” had the press behind them. Today, if you Google “Tea Party” 101,000,000 responses come up. However, if you Google “Occupy Wall Street”, 544,000,000 responses will appear! The Tea Party was responsible for electing almost 60 members to Congress. As of early December, 5,386 ‘Occupiers’ had been arrested for various causes, including drug possession and lewd behavior. At least one death has been attributed to the group. Yet they remain the darlings of the mainstream press.

The myth of the one percent is that, while they have done better in terms of income than the rest, they still, as a group, have not done well relative to overall inflation. The Congressional Budget Office reported in a recent study that the top one percent of the nation’s earners saw their real household income grow 275% between 1979 and 2007, while others in the top quintile saw their income grow 65% during those years. Income growth for those in the bottom quintile saw only an 18% increase. There is no question that during those twenty-eight years the differential widened and that the poor suffered.

But, it is instructional that inflation during the same period grew at 282%, suggesting that the top one percent only maintained their relative purchasing power. Like all statistics, one must be careful in drawing conclusions. A small number of people made extraordinary amounts of money. But, the composition of the approximate 1,500,000 households that comprise the top one percent, has changed many times. People have died. There are toddlers and preteens of the late 1970s that are now counted among the one percent. Some have ascended the ladder, while others have fallen. The fact that the income of the top one percent has failed to maintain pace with inflation should be disconcerting to all of us. The reason has been globalization.
In September, the President suggested the American people had gone soft – an observation he has not repeated. He is wrong, the people have not gone soft, but we have, with the notable exception of a few innovators, entrepreneurs and risk takers become uncompetitive in the global market place. Principal blame lies with our education system that has allowed other nations to wrest excellence from our grasp. However, a significant part of the blame lies with unions that negotiated wage and benefit plans that proved too expensive for domestic companies faced with global competition. When Toyota builds a non-union auto plant in Tennessee and manufactures better quality cars than General Motors does in Michigan with unionized workers, something is wrong. While unions served very real purposes sixty to eighty years ago, today they have become part of the problem. They are tied to the past; the future is passing them by. Public sector unions, which effectively did not exist fifty years ago, now include more members than their private sector cousins. Creating future problems, they have become the single largest factor behind the enormous debt obligations of state and local governments.

There is a tendency during difficult transitions to turn inward, to focus only on locally made products and services. The ‘Buy American’ aspect of the Stimulus Bill was such an example. But, just as money flows freely around the world, so does labor. What can be built in Stanford, Connecticut can generally be produced equally well and for less cost in Seoul, South Korea or in Fujian Province in China. We can erect trade barriers, as we did with disastrous consequences during the 1930s, or we can compete. We can compete either on a price or value-added basis. For obvious reasons we cannot compete on a price basis. So, we must be smarter and more efficient in what we produce. That takes education and training. However, the National Education Association (NEA) and the American Federation of Teachers (AFT) have long fought competition. As a result, graduates of our public schools are generally woefully unprepared for the competitive climate in which we live. In contrast, our universities are still considered among the world’s best, attracting thousands of foreign students every year. Unfortunately, after educating many of these students, we then ask them to leave – a failure of our immigration policies to adapt to a constantly changing world.

Fortunately the powerful teacher’s unions are gradually losing power, as competition in the form of charter schools, voucher programs and tax credits are increasingly ubiquitous. The Wall Street Journal recently termed 2011, “the year of school choice.” Twelve states and the District of Columbia have either enacted or expanded school choice options in 2011. This has been achieved despite powerful efforts on the part of the AFT and NEA to deny such progress. It is instructional to note that New Orleans, following its devastation from the 2005 Hurricane Katrina, opened their school system to choice. They created a system of competitive schools called autonomous charter schools. In the wake of the Hurricane, Governor Bobby Jindal had state officials take over the city’s school system. As of this month, more than 100 city schools had been turned over to charter organizations. The schools have seen rising scores on state exams and a recent poll by Tulane’s Cowen Institute shows an “overwhelming support for their right to choose.”

While the President seems determined to carry this populist message of divisiveness onto the campaign trail, the real cause of the widening income gap continues unaddressed by Washington. It has been a failure on their part to confront the competitive nature of a globally changing world. Markets will correct the situation, but recovery would come more quickly if politicians were more concerned about the needs of the people than with their own re-elections. It is a myth that Wall Street is the sole cause of income disparities. The real cause has been politics. The target of the Occupiers should be Washington.

Monday, December 26, 2011

"Christmas Past and Present"

                                                                                                                      Sydney M. Williams

                                                                                                                      December 25, 2011
Note from Old Lyme
"Christmas Past and Present"

“It is a fair, even-handed, noble adjustment of things, that while there is
infection in disease, there is nothing so irresistibly contagious as laughter and good-humor.”
                                                                                                                     Charles Dickens (1812-1870)
                                                                                                                     A Christmas Carol (1843)

“There is nothing sadder in this world than to awake Christmas morning and not be a child.”
                                                                                                                     Erma Bombeck (1927-1966)

It is a universal truth that Christmas has become over commercialized. Certainly, I have been known to argue that point, Perhaps it has? However, the truth is that in my seventy Christmases there has never been a time when commercialism and Christmas did not mix. Importantly, what has remained unchanged is the magic that Christmas conveys.

As children, growing up in New Hampshire, we were not exposed to the tree at Rockefeller Center, or the decorated stores along New York’s Fifth Avenue, as were my children and as are our grandchildren. But Derby’s, Peterborough’s department store, served just as well. The warmth of the store was welcoming, as one entered on a cold snowy day. The sound of Christmas carols filled the air. The aisles were decorated with holly. Everything looked so clean and new. Living four miles from the village, trips to town, which did not involve school, were relative rarities, and a trip to Derby’s was special.

In my memory, childhood Christmases run together, but what I remember best was getting the tree on Christmas Eve and then decorating it, and the reading of Clement Moore’s The Night Before Christmas, provided anticipation for the next morning.

The late 1940s and very early 1950s had to have been a special time for my parents and for the parents of most of my friends. World War II was recently over and my parents, like so many, were thankful to have peace restored, vowing as so many had done for countless generations that war would never infect their children. Unfortunately, that time never seems to arrive. We lived on a small farm, simply, as one might expect of young artists, interested in living on their own while raising a large family. In those early years, the house lacked insulation and there was no central heating. While wood stoves heated the downstairs and the two bathrooms were heated with hot water from a coal-fired furnace, the bed rooms, on winter nights, were very cold.

We always got our tree Christmas Eve. My father would hitch ‘Judy’ to a scoot and we would all hop aboard – by 1951, when I was ten, there already seven of us – and we would head for the woods. The house we lived in belonged to my paternal grandparents. Their home – a summer home, in their case – was located a mile and a quarter through the woods. The combined properties comprised about 400 acres, more than enough land on which to find a suitable tree. Once located and chopped down, we would return home, the bells on ‘Judy’s’ harness tinkling joyously, the vapor from her nostrils exhaling visibly against the cold clear sky. But the effort was worth it, as a fresh tree allowed my parents to use real candles, though a bucket of water always remained within easy reach.

With the tree set up and decorated, we never hung our stockings alone. There were always ones for the dogs, ‘Mopsa’ and ‘George’. Later, just before we were sent off to bed, ‘Mitzi’ our Shetland pony would come into the living room to hang one of her old horseshoes. That was always a special time, as my father would raise her front legs; the two would dance a jig, she on her rear legs, he on his two.

Sleep never came easily on Christmas Eve, but try as we might we could never stay awake until midnight when, so we were told, Santa made his appearance. Nor were we ever able to confirm my mother’s assertion that at midnight on Christmas Eve all the animals in the barn could converse in English. Instead, we would awake to the smell of coffee percolating on the wood stove, on which oatmeal had been warming all night. Toast was made by salting the top of the stove and then placing slices of bread on the stove top. Tears and laughter co-joined, as we waited for all to assemble and then to walk single file into the living room to see if Santa had truly arrived. He always had.

While those Christmases of yesteryear blend, there are moments I recall clearly, like my maternal grandparents arriving from Madison, Connecticut in 1946, coming through the front door, which was rarely used. The memory is special, for my grandfather died the next year. I remember receiving my first Hardy boy book, The House on the Cliff by Fentin W. Dixon probably when I was twelve. My excitement was such that I read it twice before letting my brother Frank read it once.

Thirty years later our Christmases in Greenwich always included the reading of Clement Moore’s wondrous tale, before a tree now decorated with electric lights. Stockings were hung as always, however, and a plate of cookies laid out on the hearth, along with a glass of milk (that became beer, as our children grew older and their belief in Santa was maintained more to humor their parents.) Nevertheless, the next morning, which arrived early, the plate and glass were empty. I remember once calling my mother at 7:30AM, to tell her that the last present had been opened an hour earlier.

Spending this past Christmas Eve and Christmas morning at our daughter’s home in Rye brought back many of my childhood memories, as well as memories of our children’s youth. But the Featherston’s have central heating and there is no Shetland that comes into the living room to hang her horseshoe, but the stockings were there and the magic of Christmas was alive and well, reflecting the excitement of children whose belief in Santa Claus has not diminished. The expressions of awe on the faces of her three children were as ageless as is the tradition of Christmas. The Holiday may reflect an overabundance of commercialism, but if that is the price we pay for the wonder that is childhood, it is a cheap.

Friday, December 23, 2011

“Reading for Pleasure and Knowledge”

December 22, 2011

Note from Old Lyme
“Reading for Pleasure and Knowledge”

“A Capacity and taste for reading gives access
to whatever has already been discovered by others”
                                                                            Abraham Lincoln (1809-1865)
I Can Read With My Eyes Shut (1978)
                                                                            Dr. Seuss (Theodore Seuss Geisel – 1904-1991)

From time to time I get asked about the books I read. There is nothing remarkable in the list. Several friends read a lot more and a few, less. For the past ten years, I have kept tabs of the books I have read, largely as a reminder; for age has reduced my ability to retain.

Books have always been important to me. My habit is to buy them far faster than I can read them. While I have both a Kindle and an I-Pad, and have read books on both devices, I prefer real books. My library is eclectic, with books ranging from current fiction to town histories, from the classics to favorite literature from childhood. One of my favorite things about books is that they transport you from wherever you are to a different place in another time. While others would rather spend leisure hours watching sports or favorite TV shows, I prefer to immerse myself into a period of history or a fictional character.

Attached are lists of the books I have read over the past two years. It includes three classics that I recently re-read. They are reminders that no matter how creative we have become, or how sophisticated we are, the art of writing knows no time: David Copperfield by Charles Dickens, Anna Karenina by Leo Tolstoi and Anthony Trollope’s Barchester Towers demonstrate that time has not damped the music of words written 150 years ago. Generally these are books we read in school or in college – too early in our lives to fully appreciate their beauty and their wisdom. They are worth re-reading today. In my limited opinion, Anna Karenina is the best novel ever published.

For almost forty years I have collected the works of P.G. Wodehouse, the British humorists known among aficionados as “The Master”, and who was described by Hilaire Belloc as the best prose writer of his age; so I always read a couple of his. The Code of the Woosters written in 1938 when he was at the peak of his formidable talents is my favorite. Lee Childs, Charles Todd (a mother-son team) and Jacqueline Winspear write diverting, fast-reading mysteries. Amor Towles wrote an extraordinary first novel, Rules of Civility, a story involving four friends that takes place in New York City throughout the year 1938. The Wall Street Journal recently named the book as one of the top ten novels of 2011. Not only is Amor a beautiful writer, but he is an articulate speaker, as we discovered when we recently hosted a lunch for him. And, my daughter-in-law, Beatriz Chantrill Williams will have her first novel, Overseas, published by Putnam in May 2012. I had the pleasure of reading an advanced copy of the manuscript a few months ago and found it very well written. Julian and Kate are memorable characters who transcend two time periods (the trenches on the Western Front during World War I and the hedge fund world of modern day New York.) I will leave it to the reader to see how she makes this surreal leap; suffice it to say that she does so in a totally credible fashion.

In terms of non-fiction, my interests lie principally in history. American Heroes by Edmund Morris, Richard Brookhiser’s James Madison and Ron Chernow’s Washington covered the Revolutionary War period. Adam Hochschild’s tale of the incredible bravery of anti-war pacifists during World War I, To End All Wars, is as moving and powerful as anything I have read. A Journey: My Life in Politics by Tony Blair was fascinating to read alongside George Bush’s Decision Points, particularly regarding the events leading up to the Iraq invasion – how they both arrived at the same decision, but from different perspectives. Blair’s more analytical mind could be contrasted with Bush’s instinctive judgments. There were other fascinating books. David Reynolds’ Mightier Than the Sword tells the story of Harriet Beecher Stowe writing Uncle Tom’s Cabin. Lincoln, on meeting Ms. Stowe in 1862, allegedly said: “So you are the little woman who wrote the book that started this great war.” Stacy Schiff’s Cleopatra carries the reader back 2000 years. I still find it hard to believe that the main street in Alexandra, at the time of Cleopatra, was as wide as Park Avenue in New York today, and that the sides of the street were designed so that sewage could be carried off. It is humbling to realize that at the time there was no civilization in Northern Europe, and it would be almost 1500 years before America would be “discovered.”

Other fiction that I particularly enjoyed were Jacques Chessex’ powerful tale of the Nazi influence in war time Switzerland, A Jew Must Die and Mario Vargas Llosa’s Feast of the Goat, which tells the story of the brutality of Trujillo’s reign in the Dominican Republican.

Who could not be amazed and moved by Laura Hillenbrand’s story of survival in the Pacific and Japanese prison camps in Unbroken, or learned something about the financial crisis we continue to live through, in reading George Melloan’s The Great Money Binge or Michael Lewis’ very readable Boomerang. Mitch Daniel’s Keeping the Republic is the best thing I have read on how to extricate ourselves from what seems to be an intractable political morass.

As the quote from Lincoln at the top of this essay makes clear, reading is not only about enjoyment, it is about learning. There is almost an infinite level of knowledge in the world of books, which is available to all for a reasonable price. And, as the title of Dr. Seuss’ book makes clear, reading allows one to use one’s imagination, a luxury in today’s world where images from televisions, computers and smart-phones dance continuously before our eyes.

Thursday, December 22, 2011

“The People to Washington – Grow up!”

Sydney M. Williams

Thought of the Day
“The People to Washington – Grow up!”
December 22, 2011

What is amazing to me and I suspect to most Americans is the lack of seriousness among our elected officials in Washington regarding the worst recession since the 1930s. The latest juvenilia flap concerns a two-month extension of the payroll tax cut. Our Washington contingent could learn something from Paul of Taurus, who in his Letter to the Corinthians, wrote, “But when I became a man, I put away childish things.” Childish behavior has become endemic to Washington.

The Republican-controlled House declined to pass the Senate bill for a two-month extension of the payroll tax cut – an easy enough bill to have been approved, as it passed the Senate 89-10 – choosing instead to refer it to committee, which is usual in any bill, as a means to resolve differences between the House and the Senate. Keep in mind that the House is called the “People’s House”, because its members, being elected every two years, tend to vote more in keeping with the wishes of the people. The President claimed that failure of the House to approve the Senate bill “could endanger the U.S. economic recovery” – a patent mistruth. It’s not big enough and, more importantly, it’s temporary. The Senate chose politics and expediency over sound policy; the House voted for policy, but will certainly lose the political battle. Either way, the real losers will be (or would have been) the American people. Taxes will rise in January, given no agreement on the extension. On the other hand, should the Senate bill prevail, the people will simply be given a temporary gift, which could be taken from them in two months or twelve months, and Social Security would be deprived of badly needed revenues.

The payroll, or FICA, tax is levied at 12.4 percent on the first $106,800 of earned income – half paid by the employer and half paid by the employee. In 2011, the employees share was reduced from 6.2 percent to 4.2 percent. The employers share remained unchanged. The two percent reduction amounts to $1000 in annual savings to a worker earning an average wage – not insignificant.

But, where the President is wrong is in what has endangered the recovery (and continues to do so.) It is the temporary nature of the tax cut. To restore confidence, consumers and businesses need a sense that any changes in taxes will be permanent. Temporary measures do not work.

The year 2011, in terms of fiscal policy, has been one of abject failure. In February 2010, President Obama established a deficit reduction committee, headed by Alan Simpson and Erskine Bowles. In December 2010, they reported out a $4 trillion ten-year deficit reduction plan, which was ignored by the President, as the New Year began. The Administration failed to file a budget for the year until months late. The debt-ceiling crisis went down to the wire, finally being signed into law on August 2nd as the Budget Control Act of 2011. Three days later, on August 5th, Standard & Poor’s, for the first time ever, downgraded the credit rating of the U.S. government bonds. During the summer Congress named a 12-member “super committee” to find an additional $1.5 trillion in debt savings over ten years. They were unable to come to agreement. Theoretically, the failure to produce a plan will result in a $1.2 trillion across-the-board cut. We’ll see. In the meantime, public debt rose $1.23 trillion during fiscal 2011, and has risen another $300 billion since.

Thus far, the full impact of the increased debt has been muted by a strengthened Dollar and declining interest rates. Government officials should know that this year’s decline in rates has nothing to do with the fiscal well being of the United States and everything to do with the relative strength of the U.S. economy globally. As the world’s economy slowly recovers, interest rates will rise, because of either real demand or inflation. Either way, the United States has positioned itself for a very real increase in interest costs over the next few years.

Despite the fact that Pete Isberg, President of the non-sectarian National Payroll Reporting Consortium, has questioned the viability of the Senate plan, Republicans have found themselves politically boxed. From a public relations perspective they look like the Grinch that is stealing Christmas for 160,000,000 working Americans. One suggestion that House Republicans (whose fault often is that they are more principled than political) might want to consider would be to pass the identical bill passed by the Senate, but extend its term from February 29 to December 31, 2012. That might serve to put the ball back in the Democrat’s court, allowing the GOP to resume its mantle as the party of tax cutters. It is hard to imagine the President not signing such a bill.

Once this fiasco has passed, it should be incumbent on both parties and the President to put away their childish behavior and begin behaving like the responsible men and women they are supposed to be. The economy needs help. Working to simplify the tax code, eliminating deductions and special credits, lowering the nominal rates and broadening the base is in the interest of all of us. Aldous Huxley once wrote, “That men do not learn very much from the lessons of history is the most important of all the lessons of history.” It is the predictability of permanent tax cuts (to the extent that anything in Washington is permanent, other than idiocy) that would encourage employers to rehire and to get the economy chugging along.

Wednesday, December 21, 2011

“Is It or Isn’t It Inside Information?”

Sydney M. Williams

Thought of the Day
“Is It or Isn’t It Inside Information?”
December 21, 2011

Trading on material inside information is a criminal act. If investor A is told by a company’s CEO that the dividend will be cut at the next board meeting and then sells his stock to Investor B who is not in possession of that information, he, and the CEO have committed a criminal act and should be punished. If investor A contributes $10,000 to the campaign kitty of the House Finance Committee chairman who then lets on that a certain bank is in jeopardy, the investor is in possession of material inside information. If he acts on the data, he is guilty (or should be – I am not a lawyer) of violating insider trading laws, and so should be the one offering the information. However, should investor A travel to Washington to listen to members of Congress express their views as to the likelihood of the passage of a particular piece of legislation and then, after analysis of the companies that may be affected and using her judgment, buys shares from investor B, she should not be deemed to be in possession of material inside information. At least that is my opinion. The laws are murky.

Determining what is material non-public information has always been difficult, and is especially so in a day when information swoops across the country from internet portal to blog in seconds. An article in Tuesday’s Wall Street Journal (“Inside Capital, Investor Access Yields Rich Tips”) did little to clarify the landscape.

Investing successfully is about gaining an edge. It combines gathering information, analyzing the data and exercising judgment. It requires hard work, diligence and an instinct for investment. Like every other enterprise in life, it is an industry in which a few people excel, but most do not. It is an industry that attracts both the intelligent and the devious. People who do well tend to do very well. In a political environment increasingly dominated by those who prefer equality of outcomes to acknowledgement of the success of the exceptional, the working assumption of many in Washington appears to be that success can only be achieved through unfair advantage.

This search for fairness has inculcated our society for many years. In 1961, Kurt Vonnegut wrote a short story, “Harrison Bergeron.” The story begins:

“The year was 2081, and everybody was finally equal. They weren’t only equal
before God and the law. They were equal every which way. Nobody was smarter
than anybody else. Nobody was stronger or quicker than anybody else. All this
equality was due to the 211th, 212th and 213th Amendments to the Constitution,
and to the unceasing vigilance of agents of the United States Handicapper General”.

Fourteen year old Harrison Bergeron is removed from his family. Because of his exceptional talents he must be fitted with handicaps. However, he escapes, declares himself emperor and is shot by the Handicapper General, Diana Moon Glampers. All of this happens on TV, which his mother Hazel is watching. She tells her husband George that something sad happened on TV, but she cannot remember what it was. George tells her to forget sad things.

Our society appears to be drifting in such a direction. Elementary schools have become reluctant to single out gifted or otherwise talented children. Paul Bennett, the Canadian author of The Grammar School, wrote about John Taylor Gatto and his recent book, Weapons of Mass Instruction: “The underlying message is crystal clear; public schools have become agents of compulsory schooling strangely akin to sausage ‘factories’ for both students and teachers.” Routinely all children are rewarded for participating in sports. Exceptional talent is rarely singled out.

This odyssey for fairness based on equality has permeated our government. While regulators and the Justice Department need to be vigilant in searching for those who violate insider trading laws, they must also be cognizant that there is a significant grey area – that they do not confuse exceptional research with inside information. The desire to level the playing field can become absurd. Is it unfair that those of us on the East Coast have a three hour advantage over those on the West Coast when it comes to reading the Wall Street Journal? Is it wrong that some investors have more assets than others, so therefore garner more attention from brokers? Is it fair that members of Congress can trade on information that would send a mere mortal to prison? Should those who are smarter, work harder and more nimble be penalized with handicaps ala Harrison Bergeron?

Analysts are hired to search out information that can provide an edge. They must read prospectuses, 10Ks, annual reports and research notes. They must visit managements and manufacturing facilities; they do store checks, roam through warehouse, speaking to everyone possible. It takes judgment and an ability to assess the data and to form conclusions. If done successfully, the analyst or portfolio manager will do well. And the success may well be in part due to being in possession of information not generally known, not because someone whispered in an ear that a plant is to be opened or legislation passed, but because of extraordinary effort.

This is a topical subject. Confidence in our markets has been waning. There is a school of thought that says the whole system is rigged. People watched government bail out banks three years ago. Some of that money was used to reward traders who had fostered the credit implosion, none of whom have been imprisoned. On the other side, there are those who are convinced that regulation is strangling initiative, including fundamental research. It is critical that government gets this right – lock up the bad guys, but recognize that there are differences in people – some are just better investors. Is it, or is it not material inside information?

Tuesday, December 20, 2011

"A Bipartisan Healthcare Plan - Perhaps?"

Sydney M. Williams

Thought of the Day
“A Bipartisan Healthcare Plan – Perhaps?”
December 20, 2011

“We can elect a man to Congress, but we cannot make him (or her) legislate. ”

The first clue that the Wyden-Ryan bi-partisan healthcare proposal unveiled last Wednesday may be more than just another political feint is that the New York Times reported the news on page 29 of the first section. The Wall Street Journal, in contrast, placed its article on A2, but that may have been because the authors of the proposal, Senator Ron Wyden (D-Oregon) and Representative Paul Ryan (R-Wisconsin), had an op-ed in the paper that morning. It would have been impolitic to have placed the article somewhere deep within its pages.

For two reasons this proposal is important. First, and most critical, Medicare is on a trajectory to either bankrupt the nation, or to deprive its recipients of real healthcare. One way or another, it must be dealt with. Second, Congress, with approval ratings hovering just above single digits, needs to show the American people they can actually do something in a bi-partisan fashion.

The plan, as announced, would make structural changes in Medicare and limit the government’s open-ended commitment to the program. (There are skeptics who suggest that the Affordable Care Act will be funded on the backs of seniors.) The system, as proposed, would limit spending increases to growth in GDP, plus one percentage point – a slower rate of increase than Medicare has historically enjoyed. But, importantly to those of who recognize the value of competition, Wyden-Ryan would allow private insurance companies to compete alongside Medicare, providing consumers a choice. It is possible, of course, that Medicare’s financial clout – and government backing – could keep competitors at bay; so that competition would remain more a mirage than a reality, but then look at the U.S. Post Office and compare it to Federal Express or UPS. Any private plan would have to cover specific ailments and procedures while offering benefits equal to or greater than Medicare. Congress would have the authority to cut payments to providers or suppliers for overspending.

Additionally, the proposal incorporates a “means” component. Government could increase Medicare premiums to high-income beneficiaries, while lower-income beneficiaries would have all or some of their premiums paid.

As expected, Liberals expressed concern that the highly popular fee-for-service Medicare will be weakened. They argue that government is the only force capable of cost control and worry that diverting beneficiaries into private plans will weaken Medicare’s bargaining power. Conservatives remain concerned that an agreement with Senator Wyden is tantamount to placing a liberal-based Trojan horse within the Republican caucus – and that the President remains adamant in his desire for a single payer.

Medicare is the elephant in the room when it comes to government programs, loved by its recipients, but unaffordable in its current conformation. The system has been termed the “third rail” of politics, for the simple reason that politicians have no problem giving away other people’s money, but they shun from taking anything back. Presidents and Legislators have deliberately avoided the issue, assuming the position of the three monkeys – they see no evil, hear no evil, so speak no evil. Of course, any rational person who has taken fourth grade math knows that Medicare, in its current form, cannot survive. Nevertheless, every member of Congress assumed it would last through their term. ‘Kick the can down the road’ has been their mantra. However, it is now too late for any member of Congress to assume that ostrich-like position.

In my opinion the most important aspect of the Wyden-Ryan plan is that it introduces the concept of competition. Healthcare is different from other purchases, in that, in cases of emergency, the care must be rendered without scoping out the competition. There is not the time. But, in other cases, in terms of drug purchases, elective surgery, insurance coverage, who do you want as your primary physician the market should be open to competition. Our healthcare analyst, Avik Roy, writing in Forbes, said it well: “This principle – the principle of making the sellers of health care compete with each other – is at the heart of competitive bidding, which in turn is the core of the Wyden-Ryan proposal.” Unfortunately, though, Wyden-Ryan does nothing to address the urgent need for tort reform, so costs associated with rising and unnecessary legal settlements will continue to plague the industry and consumers.

The reviews of Wyden-Ryan have been mixed. The Washington Post congratulated the two legislators for “for having the tenacity to try again.” The “Lund Report” attacks Senator Wyden for caving into the Tea Party: “In Oregon, we like our Medicare just the way it is.” The Des Moines Register is worried that the focus on budget cutting threatens compromising America’s historical leadership in medical research. Avik Roy, again writing in Forbes, notes that no plan getting through Congress will ever be perfect, “but it’s likely to be our best chance of getting both parties to come together…If it succeeds, Wyden-Ryan may turn out to be one of the most significant legislative initiatives of the decade.”

From my nonprofessional perspective, Wyden-Ryan looks like a good start. It is certainly better than staying with a system that will lead to bankruptcy, and we will see what finally evolves. Nevertheless, I would have preferred something closer to the original Ryan plan, and I can assure you that no one was going to throw this grandfather off a cliff. In politics, you must take what you can. Political concessions are usually imperfect, but compromised solutions have treated this country very well over the past two hundred years. Democracies have never been known for being efficient; efficiency is used as a justification for the world’s dictatorships and totalitarian regimes, whether it’s the Fascists of seventy years ago in Italy with their trains, or the Chinese today with their manufacturing. In the end, though, they always fail.

Monday, December 19, 2011

“Sustainable Capitalism – Euphemism for Statism”

Sydney M. Williams

Thought of the Day
“Sustainable Capitalism – Euphemism for Statism”
December 19, 2011

There is little in life so dangerous as a deceptive concept dressed in protective coloring. The term “sustainable capitalism” falls into that category. Sustainable capitalism is based on the belief that free market capitalism has failed. Supporting that belief would be the widened income gap, the near collapse of the financial system in 2008, and the emphasis of investors and management on short term results. Business decisions based on fulfilling short term market expectations have led to boards of directors ignoring the longer term implications of their strategy. The grasp for profit, these people believe, is destroying our environment and menacing our climate. A new and better form of capitalism is required – sustainable capitalism, which incorporates ecological integrity, social responsibility and economic viability. In short, what is wanted is a utopian dream.

Seven years ago John Ikerd, a professor emeritus of agricultural economics at the University of Missouri, wrote, Sustainable Capitalism: A Matter of Common Sense. The book is based on the seemingly commonsensical concept that an economy can only grow indefinitely if it can do so without consuming more energy and natural resources than it reproduces; but, tellingly, it ignores innovation. The line of reasoning is similar to the 1972 report issued by the Club of Rome, “Limits to Growth” that focused on ecological sustainability. It is reflective of the “Bruntland Report”, issued in 1987 by the United Nations Commission on Environment and Development, which defined sustainable growth in social and ethical, as well as in ecological terms. Both reports were based on the noble idea that present day capitalist scavengers were destroying the opportunities for future generations. But, like the Malthusians of 200 years ago, neither report allowed for the creative ingenuity of individuals operating in a free market environment. What the Malthusians and the Club of Rome did not anticipate was the growth in technology, which, thanks to scientists like the American agriculturist, Norman Borlaug, greatly increased per-acreage food production in undeveloped parts of the world.

Free markets do have short comings. Excesses get built into the system, allowing speculators to make unreasonable profits, as they did in the financial industry in the later half of the past decade. But, people and businesses are also allowed to fail. At times, unscrupulous operators take advantage of the unwary. Outcomes are never equal; free markets are merit based. There are people who work harder than others; some have more talent or luck. Certainly there are those few businessmen who aim for short term gains – they will rip off customers, milk their resources and then, with cash collected, disappear into the night. Even the tightest regulations will never get rid of all the bad guys.

However, free markets are easy to understand; they are not plagued with multiple agendas. A profit is the principal purpose of any business; though all for-profit enterprises are responsible to four constituencies – customers, employees, owners and community. The confluence of those constituencies allows a business to prosper and grow, increasing employment and raising living standards. In a purely market based economy, failure means bankruptcy and loss of capital. Creative destruction keeps businesses flexible and executives alert, adapting as technology changes. Of course, our capitalist system, while not mercantilist, does have a large government component. Unfortunately it was government that permitted banks to become too big, and has allowed tax credits and expenditures to benefit certain industries over others. Also, financial repression has kept interest rates lower than where they would be if left to market forces, negatively impacting savers while helping borrowers. And, it has created an atmosphere of crony corruption with big government teaming up with big labor and big business. Sustainable capitalism, by definition, increases the role of government.

It is not that the idea of sustainable capitalism is all bad. There has been a focus on short term profits versus long term investment. The world’s population continues to expand, albeit at an increasingly slower rate. The developing world is becoming richer, which means standards of living are rising. Rising living standards translate into an increased demand for consumer goods, which, in turn, drives demand for natural resources.

The problem with sustainable capitalism is that it relies on government bureaucrats. Not surprisingly the single most public advocate has been Al Gore and his firm, which has made him a fortune over the past decade, Generation Investment Management. Mr. Gore and his partner David Blood, like all opportunistic capitalists, have taken the financial crisis and turned it to their advantage, the difference being that they have arrogantly disguised its wolf’s body in the clothing of a peaceful lamb. Mr. Gore, in a Wall Street Journal op-ed three years ago, placed the blame for the crisis on an emphasis on “short-termism”, poor governance, regulation and misaligned compensation and incentive system. While all of those factors played a role, he conveniently ignored a culture, fostered by government that encouraged people to live beyond their means. It was debt and exceptionally low interest rates that allowed asset prices to rise beyond reasonable levels that are at the root of the cause. Government (and unions), in terms of welfare benefits, aggravated an entitlement culture, by promising what a prudent man knew they could not deliver. Government sponsored enterprises (GSEs), like Fannie Mae and Freddy Mac – equally complicit – were mandated by Congress to lend to those with poor credit histories, regardless of the consequences.

In a Wall Street Journal op-ed last week, Mr. Gore and his partner David Blood penned another missive advocating sustainable capitalism. Sounding like Old Testament prophets, their tone has become even more hysterical: “The disruptive threats now facing the planet are extraordinary: climate change, water scarcity, poverty, disease, growing income inequality, urbanization, massive economic volatility and more.” Regardless of their spiteful tone, environmental issues, at least in the developed world, have been improving for decades; world-wide, poverty is in decline; income inequality in the U.S. peaked ten years; urbanization is a natural trend that has been on-going for two hundred years, and markets have always been susceptible to bouts of volatility. Mr. Gore is simply trying to drum up business for his firm, a perfectly respectable thing to be doing, except for the hypocrisy of his argument. Among his recommendations for “immediate adoption” is to end the practice of companies’ issuing quarterly guidance; he favors a system of issuing guidance “only as they [management] deem appropriate (if at all.)” Should Mr. Gore take his firm public his intent would be to disclose as little as possible!

But, most insidious, sustainable capitalism leads to statism. Perhaps its advocates see sustainable capitalism as a response to Chinese mercantilism? I don’t know. Calls for the integration of soft measurements, like environmental, social and governance factors into markets, implies an understanding that someone (a new Czar?) must determine those standards. There is also, in their recommendations, an inference that markets and people cannot be trusted to make correct decisions.

Certainly, I am not so na├»ve as to believe that free market capitalism is without blemish. There has been too much emphasis on the short term, but the existing tax code could address that problem. Poverty is being addressed in the developing countries. One of the immediate victims of an improved living standard is the environment, but time will address that concern in places like China, as it has done in the West. Keep in mind, environmental concerns are a luxury of the wealthy. Poor people first concern themselves with food, water and shelter. But, when people like the sanctimonious Al Gore decide that our “betters” should determine what is in our best interest, my hackles rise and I question motivation. The answer seems to me dual – financial profits and political power. Beware the wolf that bleats.

Thursday, December 15, 2011

“Cameron to Europe – Wake Up to Reality”

Sydney M. Williams

Thought of the Day
“Cameron to Europe – Wake Up to Reality”
December 15, 2011

Why should David Cameron, Britain’s Prime Minister, support a decaying system of Socialism in Europe? That may not have been what he said, but it could easily have been his message. The basic problem confronting both Europe (and the U.S.) has been one of promising what is no longer affordable – entitlements that were feasible decades ago when the workforce was substantially larger than the numbers in retirement. All the ministers and diplomats that have gathered in Lisbon, Brussels, Frankfurt, Rome and Paris, since the European Economic Community was first formed in 1957, have not addressed the shift in demographics coupled with too generous healthcare and retirement benefits that are a root cause of today’s debt obligations. “Carpe Diem” and the Hell with tomorrow has been the attitude of too many, especially those in the periphery of the Euro zone.

Europe, a continent that has seen more than its share of devastating wars over the centuries, essentially disarmed after World War II, and has lived peacefully for sixty-six years – a remarkable achievement given the last two Millenia. For defense, they have relied largely on the generosity of the United States via NATO. However, now that our federal debt has exceeded our annual GDP and our deficits are equal to more than 6% of our GDP (both numbers substantially above minimum Euro standards,) there is the real possibility that cuts in U.S. defense spending may be felt in Europe – just as Russia has become more aggressive in indicating a desire to rebuild the union they once had. Defense costs may be rising for the region, just as budgets are being squeezed, in Europe and the U.S. As much as we might wish it, DNA technology has been unable to remove the feckless gene present in political leaders that has led to wars in the past.

A European common currency – a grand idea in concept – suffered from a lack of fiscal and political unity. The ability to centrally levy and collect taxes and to direct public spending is critical to any such union. The Euro, as introduced, allowed profligate countries like Greece to benefit from relatively low interest rates, enabling them to maintain an unsustainable lifestyle, while more prudent nations like Germany were able to expand their exports, because the Euro proved a cheaper currency than the Deutschmark would have been.

Unification has never been easy. The merger of East Germany and West Germany, countries with a common history, language and heritage took more than a decade. One hundred and fifty years ago, Germany and Italy were comprised of separate states. However, their unions were made up of individual states bound by a common language, culture and a shared history. The European Union never had such advantages. Since size helps in trade, there are benefits to union. But, in my opinion, Europe put the cart before the horse when they went with a common currency before addressing the more difficult questions of political and fiscal union.

The consequences are a mess. Should the Euro break apart – still my guess – German exports will suffer and interest rates will rise for most of the Mediterranean nations. However, all would not necessarily be dark. Germany’s cost of money would likely decline further and Southern Europe’s export markets should pick up, as should their tourism. As long as any break-up is handled carefully, the effects, while certainly negative, should be manageable.

The agreement that was reached in Brussels last week – the agreement vetoed by David Cameron – would have, according to The Guardian, “conferred intrusive rights on European institutions to enforce budgetary policy in countries breaking the Euro’s debt and deficit rules.” Essentially, Cameron chose national sovereignty at the risk of isolation. The Prime Minister, again in the words of The Guardian, “demanded that any transfer of power from national regulators to an EU regulator on financial services be subject to a veto; the UK be free to place higher capital requirements on banks [and] that non-EU institutions operating in the City but not in the Eurozone, such as American banks, should be exempt from EU regulation.” Jeremy Warner, in the UK Telegraph heralded David Cameron’s decision, pointing out that there was nothing in the measures that would relieve their financial pressures: “With no fiscal or monetary transfers to compensate, peripheral nations are being forced into repeated rounds of self-defeating rounds of austerity in order to survive and pay their debts. The default mechanism of currency devaluation is also denied them.” Niall Ferguson, writing about David Cameron’s decision in The Daily Beast, added: “But he has done the right thing. And he will swiftly be vindicated by events on the cut-off continent.” The German demand for balanced budgets, given current financial conditions, would condemn periphery nations to prolonged depression. “There is,” Mr. Warner adds, “virtually no chance any time soon of these countries regaining competitiveness against an ever more competitive Germany.”

At bottom, the problem is a simple one: living beyond one’s means. After almost three decades of suffering and an enormous loss of population (1914-1945), Europe was ready for a new start. Democracy, with a socialist bent, was appealing. Birthrates blossomed in the immediate post-war years, providing the workers by the mid 1960s that allowed those who had fought in the War to retire early and comfortably. However, birthrates plummeted, beginning in the early 1960s. At the same time, longevity began to increase. Nevertheless, increasingly generous pension and health plans continued to be promised. Nobody did the math. Those baby-boomers – the pig through the python – are now beginning to retire…and now there are not enough workers to support their retirement.

While David Cameron has been roundly criticized by pro-Europeans in his own country and by many of the other 27 members of the European Union, he has done them a favor – forcing them to wake up to the root causes of their deficits and debts. Confidence in markets cannot be fully restored until politicians acknowledge policy mistakes that have led to this situation.

Wednesday, December 14, 2011

“Republican Catfights – Obama’s Dream Come True”

Sydney M. Williams

Thought of the Day
“Republican Catfights – Obama’s Dream Come True”
December 14, 2011

Monday, in what seemed like a new low in stupidity and absurdity (in a year filled with both), Newt Gingrich and Mitt Romney traded barbs in what appears to be an attempt at mutual political suicide. Romney suggested that Gingrich return the $1.6 million he had received in consulting fees from Freddie Mac. Mr. Gingrich responded: “…if Mr. Romney would like to give back all the money he’s earned from bankrupting companies and laying off employees over his years at Bain, I would be glad to listen to him.” The Grinch, in the person of Mr. Obama who has turned a bad recession into a worse one, must have smiled.

There is, of course, a world of difference between using one’s years of government service in Washington in order to make a few bucks and operating as Mr. Romney did in the private sector. Mr. Romney’s success could only have been achieved by building a number of successful companies. Nevertheless, it is impossible to separate money from politics. Estimates are that President Obama will spend $1 billion on his bid for re-election. That doesn’t count his recent peripatetic meanderings around the hustings that we taxpayers are funding. So, whomever the Republicans nominate will have to spend a similar amount. In contrast, the billion dollars Mr. Obama will be spending is three times what George Bush spent for his reelection in 2004 and eleven times what all the candidates spent in 1980, an increase of more than six times the rate of inflation.

Money is a problem, but it is far from alone. The worst part of the Presidential cycle is that it subjects the populous to all sorts of extreme statements, as contenders vie for votes from their respective bases – visions of Socialism (frightening to me) from the Left, and irrelevant (to me) social issues on the Right. We are a secular nation whose founding fathers believed in their respective Gods, but were deliberate in not invoking any particular religion. After all, it had largely been a desire for religious freedom that caused so many to seek these shores in the early part of the 17th Century. What would those men and women think of a man like Texas Governor Rick Perry reading from the Bible and speaking at a gathering of evangelicals that excluded Catholics and Jews? Jon Huntsman is the only candidate to claim a “spiritual, not religious” mantle, an approach that would have been familiar to our founding fathers. Yet, Mr. Huntsman’s poll numbers suggest that “reasonable” or “sensible” are of little interest to early Republican primary or caucus voters.

We are supposed to be an inclusive nation, comprised of immigrants who are ecumenical or tolerant in their religious outlook, and we are supposedly a nation that believes in the liberty of the individual, and that it is the individual who is the power behind the state. Instead, we have become a nation divided between bigots and Socialists. Despite his promises of being a unifier, President Obama has heralded class warfare, blaming the wealthy for all the ills of the economy – his economy.

The debates leading up to the varying primaries and caucuses that will choose delegates to the two Parties’ respective conventions are supposed to help inform voters. Instead, they have become a referendum on who can be the most extreme. Listening to Mitt Romney, in reality a centrist, Rockefeller-style Republican, speak of building a fence along the Mexican border and rounding up eleven million illegal immigrants and shipping them home, would be laughable except for the earnestness with which he speaks. Michelle Bachman’s comment that her religion “commands” that she obey her husband (perhaps that is why my wife does not like her?) raises the question that not only must we worry about Presidential succession, but we must wonder: will it be necessary to provide a partner’s desk in the oval office? (In contrast to the self-described servile Ms. Bachman, Margaret Thatcher seemed to get along very well listening to Dennis, but not heeding his every word.)

The election is the Republicans to lose. The country is in a slough of despond. People have succumbed to the negativity that has permeated our society since the end of 2008. The President, who was always admired but never loved, has seen his poll numbers dip into the low to-mid 40s, due to his humorless, narcissistic aloofness. Yet watching the debates, the eight or nine Republican contenders (the exception being Huntsman) ignore the broad center that is now up for grabs, vying only for the votes of those on the far right. The country badly wants a leader with vision and humor who appeals to independents, a person who can extricate us from the morass that keeps us down.

While my favorite among the group of Republican contenders has been Jon Huntsman, Roger L. Simon of pjmedia.com makes a compelling argument that, for all his erraticism, arrogance and smart-alecky attitude, Gingrich is the only one who “dances,” the only candidate who inspires. Perhaps he is right. Peter Boyer of The Daily Beast points out that Gingrich has inspired in the past. “Freshman Republicans in 1995, like the Tea Party class of last year, we’re true believers in the revolution they’d been recruited into by Gingrich.”

As a nation, we sorely need inspiration. A dozen years ago, the internet-tech bubble collapsed. Ten years ago our nation was attacked by terrorists, who the politically correct are still afraid to identify by name for being seen as prejudiced. Six years ago the great housing boom began to unwind. Three years ago our financial system came close to total collapse. Household net worth has declined $9.4 trillion to $57.4 trillion over the past four years – 4% in the third quarter alone! As a nation we have been traumatized. We are in a funk and there seems no way out. It is well and good for commentators and politicians to tell us that “Americans,” as Winston Churchill once said, “can always be counted on to do the right thing…after they have exhausted all other possibilities.” But we can no longer wait. We need a leader who looks upon us as one people of myriad backgrounds, means and abilities. We do not need a divider. That is what we have in Mr. Obama, and that has been the message from most of the Republican contenders – appealing to one group and the hell with the rest – except for Gingrich who, until the Romney blast, managed to keep above the fray.

A partial solution may lie in changing the primary and caucus system we use to select our candidates. We let extremists at both ends of the spectrum dictate not only the message, but the tone and medium in which it is delivered. The country is facing serious financial and sociological problems. As a nation and individually, we have borrowed too heavily. Too many have become overly reliant on government, a government that is largely financed by too small a group of people. Public sector employees, including union members, no longer understand that they work for the people – not the other way around. A cavalier and arrogant attitude in Congress manifested in the 2010 healthcare debate – what applies to the people does not apply to Congress – became pervasive. Social Security is no more than an intellectual exercise for those in Congress, as they have a separate and far more attractive retirement program. The insider trading scandal in Congress, brought to our attention in a November 13th 60-Minutes expose, was mentioned in a Wall Street Journal op-ed yesterday by Yale Law School professor, Jonathon Macey: “On closer examination, it appears that what Congress really wants is to keep making the big bucks that come from trading on inside information, but to trick those on the outside of the Beltway that they are doing something about this corruption.” Government has become “them” and the rest of us “us.”

But Republicans appear to be ignoring their opportunity. With their focus on issues like gays in the military and keeping immigrants out, they ignore the monumental issues of debt and entitlements. Republicans are playing to their base; they risk losing the election.

Tuesday, December 13, 2011

"Big Brother is Eyeing Us - For Good or Evil"

Sydney M. Williams

Thought of the Day
“Big Brother is Eyeing Us – For Good or Evil?”
December 13, 2011

We have all become increasingly aware of the fact that no matter what we do, where we go, or who we see, someone is watching us. It may not be “1984” yet, but it is getting pretty close. Most cell phones have a GPS chip built in, allowing your movements to be tracked within a few feet. Credit cards record all purchases – where and when. A car’s GPS system – built into its navigation system – tracks your car within a few yards. Last week I spent a few days skiing in Vail where the concept really hit home. Their Epic Pass has a chip that allows the mountain to track your every movement – the lift you ride, the trail you come down, when and where you take a break. The system is popular; it calculates the vertical feet one skis; it also allows one to track one’s friends, knowing what lift or trail they are on.

There is much that is useful, and even potentially lifesaving, in the ubiquity of such technology, but there is the risk that the information may fall into the wrong hands. Either way it is antithetical to the concept of the independent individual on which our society is based. Keep in mind, the Fourth Amendment of our Constitution guarantees the “right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures.”

In the wake of the terrorists attack on 9/11, the Patriot Act was drafted, passed by Congress and signed into law by President Bush on October 25, 2001. (It is amazing how quickly Congress can act when they choose to!) The Act essentially provided the federal government the tools that were already in place – with court-ordered warrants – to counteract organized crime and drug trafficking. But, it did so while generally eliminating the necessity of getting court approval to search e-mails, tap into phone calls, access medical, financial and library records. A crisis, it has been said, is a terrible thing to waste. Most of the Act’s provisions were set to sunset in four years; however, it was reauthorized in 2006. And, on May 26, 2011, President Barack Obama signed another four-year extension of its key provisions.

Other than an old flintlock, there are no weapons in my house. Apart from a brief period in the U.S. Army, I have never fired a weapon. Nevertheless, the right to bear arms is an intrinsic right of our citizens and one supported by the Second Amendment. And I strongly support the notion that, in the case of a crime or an accident, it is almost never the inanimate weapon that is at fault; the fault lies with the bearer, or the owner. Thus, it was interesting, amusing and a little frightening to read of Professor David Kopel’s recent testimony before the Senate Judiciary Panel on the Schumer Registration and Rights Denial Bill. Mr. Kopel teaches at the University of Denver’s Sturm College of Law. (The name “Sturm”, presumably, derives from Sturm Ruger, the manufacturer of the Ruger SR9 pistol and seventy other weapons.) Senator Schumer’s Bill appeared not only to violate the Second Amendment, but also the Fifth. When Senator Schumer seemed unaware of some of his Bill’s provisions, Professor Kopel suggested he redraft the text to reflect his intent. The Bill is still pending. Certainly, if a chip can be embedded in a credit card and car, it could be placed inside a weapon. While such a decision may be applauded by some, the consequences could be a decrease in gun sales and an increase in gun thefts.

The 2012 Defense Department Authorization bill, which the Senate is currently considering, contains a provision that would authorize the U.S. military to indefinitely detain anyone they consider to be engaged in hostilities toward the United States, without charge or trial. The provision would not restrict military detentions to people in specific countries or regions of the world and would apply to U.S. citizens living within the United States. While I agree that vigilance is critical in a world as dangerous as the one in which we live, is it worth living in a prison, even one guarded by those whom we have elected? President Abraham Lincoln did suspend the Writ of Habeas Corpus in 1861, allowing the government to hold suspects indefinitely without charge, but that was during the Civil War and he was criticized at the time.

Unmanned predator drones are being used not just in theaters of war or for border surveillance, but to search out criminals on American soil. Michael C. Kostelnik, retired Air Force general and Assistant Commissioner of the Office of Custom and Border Protection, was quoted recently as saying that predator drones are flown “in many areas around the country, not only for federal operators, but also for state and local enforcement.” Ohio Democratic Representative Dennis Kucinich, with whom I don’t often agree, spoke last summer against the domestic use of predator drones: “…we have slipped into a spooky new world where joystick gods manipulating robots deal death from the skies and then go home and hug their children…The proliferation of drone technology and its inevitable extension into civilian law enforcement is a leap into the arms of Big Brother.” It is this fear of an omnipotent government that has made so popular fictional characters like Lee Child’s Jack Reacher, an ex-Army MP who travels the country, courting trouble without car, cell phones or credit cards.

It may be that my words are unduly alarmist, and perhaps they are. But our democracy has always been fragile. The enormous strides in surveillance technology, the increased power of appointees within the executive branch who are not beholden to Congress, the real threat of terrorist activity and little understanding of history on the part of too many people provide risk to our individual freedoms. “Truth,” wrote George Orwell, “is treason in the empire of lies.”

We in the United States have lived free from a tyrannical government for over two hundred years. It becomes easy, therefore, to succumb to the notion that government is benevolent and can do us no harm. But the founders of our nation knew otherwise, as do millions of people today who have come here from countries that do not have our basic freedoms.

It is easy to slide insidiously into repression. Just ask Jews who lived in Germany in the early 1930s. Over the years, novelists have warned of the consequences of an expanded and centralized government. Dystopian novels like Alduos Huxley’s Brave New World, Fahrenheit 451 by Ray Bradbury and A Clockwork Orange by Anthony Burgess, among others, have dealt with a future in which dehumanized people led lives fearful of an all-knowing and all-powerful government. Technology and surveillance systems today have rendered such possibilities as probabilities. The fear of terrorism has made us more willing to tolerate increased government intrusion. Predator drones attack our enemies without putting our soldiers at physical risk, seemingly inconsistent with their job description. There is no halting technological development, nor should there be. Nevertheless, the risk of an unscrupulous person gaining power exists. Our democracy is based on a system of checks and balances. However, since 1933, the executive branch of our government has assumed increasing powers – today manifested in the 38 “czars” working in the Obama Administration – 33 of whom function without Senate confirmation.

In the wake of Communism in Russia and Nazis in Germany, Sinclair Lewis titled his 1935 novel, It Can’t Happen Here. So far it hasn’t, but that is no reason to let down our guard.

Monday, December 12, 2011

"Fairness - The Solution to our Problems?"

Sydney M. Williams

Thought of the Day
“Fairness – The Solution to Our Problems?”
December 12, 2011

Fairness. That was certainly the message the President wanted to send when he spoke in Osawatomie, Kansas last Wednesday. “It is a view,” he said, “that says in America we are greater together – when everyone engages in fair play and everybody gets a fair shot and everybody does their fair share.” The words sound more than fair. The problem is defining “fair.” My dictionary, an unabridged Random House of 2214 pages, has 31 definitions for “fair.” A first edition of Webster’s Dictionary published in 1828 sitting on an adjoining shelf, and which is used more to look at than look through, has a mere 17 definitions. When “Obama” and “fairness” are googled, 14,100,000 results appear in seven seconds. Fairness tends to be one of those conditions that comes under the category of “we know it when we experience it.”

The three witches in Macbeth, creatures of the night, are meant to confuse their audience by proclaiming that “fair is foul, and foul is fair.” However, just to toss more mushrooms into the stew, there are at least three other sayings: “fair is fair”, “all is fair in love and war” and “Life is not fair!” How many times have we expressed the last sentiment, or heard it said. We walk away dizzy. I asked my ten year old grandson, Alex, what he thought the word meant; he suggested that something was fair when all agreed to it – a definition as good as I could find, but one seemingly impossible to achieve and certainly not in Washington today – what is fair to one seems foul, or unfair, to another. When Mr. Obama uses the term “fair”, it implies that government be the arbiter.

As mentioned above, we generally recognize fairness, or unfairness for that matter, when we see it. Jon Corzine, former CEO of Goldman Sachs and former U.S. Senator and Governor of New Jersey, became CEO of MF Global a little less than two years ago. $1.2 billion dollars of customer funds disappeared on his watch. On Thursday, in testimony before Congress, Mr. Corzine said: “I simply do not know where the money is.” Co-mixing customer funds and a firm’s capital has been a no-no ever since the concept of banking began. It so happens that the chairman of the regulatory body principally responsible for MF Global – the Commodities Future Trading Commission (CFTC) – was Gary Gensler, a former partner of Goldman Sachs when Jon Corzine served as CEO of the firm. It would appear that Mr. Gensler cut a little slack for his friend and former boss, Mr. Corzine. That does not have the appearance of being fair.

Fairness and justice are strongly linked. Astraea, a daughter of Zeus and Athena, in part because of her predilection for fairness, was considered the Goddess of Justice. Recently, Nancy Koehn reviewed The Ajax Dilemma: Justice, Fairness and Rewards by Paul Woodruff in the New York Times. When Achilles, Athens chief warrior, was slain in battle, Odysseus and Ajax argued before King Agamemnon as to which of the two would replace him. Ajax was considered, as Ms. Koehn writes, “courageous, loyal and hardworking.” Odysseus was thought of as “innovative and articulate, but not completely trustworthy; his values seem to fluctuate to suit his interests.” Ajax loses. Professor Woodruff makes the analogy to present day Wall Street – that Odysseus, with his less than fixed moral compass, represents Wall Street, or the “one percent.” In denying Ajax the top prize, the King and his jurors “effectively destroy not only Ajax’s motivation, but also the morale and engagement of the other troops, virtually all of whom see themselves as loyal.” But somebody did have to win – a concept perhaps difficult to comprehend at a time when elementary schools hand out awards for participation, rather than recognizing that young children have differences in talent.

Talent versus loyalty; brain against brawn – an age-old dilemma and intimately tied to fairness, or perhaps the lack thereof. In a meritocracy, there are winners; and when there are winners there must be losers. Is that fair? Was it fair for the poor souls – as many as two million – who were born within two or three years of 1894 in England, Germany or France who died in trenches in World War I, for a cause with which they had no input? Was it fair that my father died of cancer at the age of 58, or that my brother, Stuart, was born with Prader-Willi symptoms? Of course it is not. Should assistance be provided to help those such as my brother? Of course. But, there are murkier questions. Is it fair that some are endowed with greater intelligence or more athleticism than others? Is it fair that some people got into financial trouble because they took out a mortgage they could not afford? Is it fair that the more prudent have been penalized, first by having interest rates kept artificially low on their savings and, second, by having to bail out their profligate neighbors? Should we provide a head start on life’s race to those who work less hard, or who have less ability? I don’t think so. As George Orwell wrote in Animal Farm, “All animals are equal, but some are more equal than others.”

Fairness on the part of government, in my opinion, has to do with opportunities, not with outcomes. The greatest opportunity a state can provide a young citizen is the best education available. In this instance, as scores and competition tell us, we have not performed well. Fairness means choice, especially in education. In schools, the needs of the students should supersede the demands of teachers. There is little I have ever seen that is sadder than watching a mother’s crestfallen face when, at a lottery, her child is denied an opportunity to attend a charter school because the American Federation of Teachers (AFT) or the National Education Association (NEA) have limited the number of places available. Competition in any endeavor is fairer than having choices made for one by some appointed committee. Immanuel Kant put his finger on an eternal truism: “The death of dogma is the birth of morality.”

It is all well and good for President Obama to travel to Kansas and tell us we should be fairer, but his record does not match his rhetoric. He has increasingly made the state the arbiter of what is right and wrong, the best examples being healthcare, the EPA and the Consumer Protection Agency. He has sought equality of outcomes, at the expense of equality of opportunity, the best example being his ties to teacher’s unions. At its essence, his assumption is that the state knows best and, as head of state, he knows better than anyone else. The Declaration of Independence expressed far more humility than does Mr. Obama: “Government derives their power from the consent of the governed…The people have the right to abolish or alter it.” Both the Declaration of Independence and the Constitution have at their core that those who govern work for the people, not the other way around. Fairness means that those in Washington should acknowledge that inalienable right of the people. Fairness is critical to a healthy and prosperous future, but it is a fairness that stems from the people, not from some bureaucrat telling us what “fairness” means.

Friday, December 9, 2011

"Lessons from Sherwood Forest"

Sydney M. Williams
Thought of the Day
“Lessons from Sherwood Forest”
December 9, 2011

Robin Hood, a fabulist character first mentioned in ballads from the late 14th Century England, practiced the concept of redistribution. He, with his band of Merry Men, was portrayed in tales as an honorable outlaw who robbed the rich and gave to the poor. The lesson of Robin Hood has been well-learned by 21st Century American politicians, in whom honor is generally latent or missing. In the U.S., federal government expenditures have increased at a faster rate than receipts for several years. Much of that increase has not gone to help the indigent, but to feather the already opulent nests of the raptors that represent us in Washington. Everyone in that city seems to have the appetite of ‘Little John.’

Always in pursuit of new sources of cash flow, and as a reaction to populist anger against bankers, governments around the world are considering a coordinated financial transaction tax (FTT). In September, the European Commission proposed an EU-wide FTT. In late October, two Democrats, Representative Peter DeFazio of Oregon and Senator Tom Harkin of Iowa, proposed a similar tax for the U.S. It would be, as the New York Times described it on Wednesday, “a way to claw back money from the top 1 percent to help the other 99 percent.” The Times ignores the fact that, according to the Congressional Budget Office (CBO), the highest earning 1% paid 39% of all federal income taxes in 2009, versus 18% in 1979. The federal tax code is more progressive than it was thirty years ago when nominal rates were higher than today. “Debt-burdened governments,” Reuters noted on November 2, have a “need for new revenues.” Of course they do. Both sides of the aisle seem incapable of reducing spending, regardless of waste, and seemingly impervious to the debt they bequeath to our children and grandchildren.

It is true, as Dean Baker of the Center for Economic and Policy Research (CEPR) noted in a December 2008 piece, that the effect of an FTT would be felt hardest by High Frequency Traders, a group with whom I have very little sympathy. But, then, why not target them specifically? The rates proposed by the DeFazio-Harkin combination – 0.3 percent on stock, bond and derivatives prices – may seem small; however, for the last ten years returns on equities have been negligible, while the yields on many bonds are near historic lows. As a percentage of total annual returns, 0.3% is not insignificant. We are a country badly in need of increased savings and investments, especially for the middle class whose future looks about as rosy as spilt red paint, so doing anything that will hurt investments appears unwise.

The principal problem we face is debt overload. The answer is economic growth. Democrats would like to raise taxes. Republicans want to curtail spending. Both are wrong, as both would inhibit growth – Democrats in taxing job creators and Republicans by removing funds from the needy. The answer lies in two parts: First, tax reform that allows the economy to grow at its maximum, which will foster an increase in tax receipts, and, second, spending controls that will keep growth in outlays at a rate no higher than GDP growth.

Wealth, whether individual or it belongs to a state, allows more choices. At the moment, our nation is teetering on the edge of a chasm entitled ‘debt induced poverty’. The very size of our national debt – approximately 100% of GDP – is a drag on growth. There is much the Obama Administration would like to do to make life easier and more pleasant. But, what they want to do, we cannot afford, at least not at this time. Like a family caught in a financial bramble, we must earn our way forward. Bowing to the demands of a few environmentalists, for example, who would prevent (or even delay) the building of the Keystone Gas Pipeline, at a time when unemployment in the construction industry is 13% and high energy prices are impacting everyone, seems as selfish as it is foolish. Competition, whether it is in the classroom, on the factory floor, in the laboratory, or in the corporate boardroom, is intense and it is global. To do all the things we want to do, we must first address factors like taxes, regulation and unions that are holding back economic growth. We need to earn more money.

The FTT would be largely a Trojan Horse, inserted by Congress, allowing them to fund their favorite programs, while ignoring difficult spending choices. Any tax that impedes growth should be dismissed. The President and Congress appear to be living a Walter Mitty life, oblivious to the damage caused by debt – debt that is in fact mispriced, so is far more onerous than it seems today. Common sense tells us that had the Fed not intervened, rates would be higher by two or three hundred basis points – implying an increase in annual interest costs of $300 billion to $450 billion. At some point, if nothing is done, the dollar will cheapen and rates will rise.

The concept of an FTT also raises the question of what happens if one country opts out. For example, if the UK did not go along, London would benefit, as security trades, naturally, would be executed on those exchanges that are the least costly. The temptation to do so would be too great. New York City banks, which have already lost more than 100,000 jobs, would lose thousands more.

Taking from the rich and giving to the poor is the essence of a progressive tax code – an idea with which almost everyone agrees. But there is a limit to what any nation can afford. With federal debt nearing 100% of GDP, we are approaching that limit. We exceeded that level during World War II, but for far more understandable and necessary reasons than today. Congress and the President should put their collective heads together to answer one question: How do we grow this economy. Margaret Thatcher and Ronald Reagan, in this regard, are far more relevant than Robin Hood.

Thursday, December 8, 2011

"The Future - Opposing Views"

Sydney M. Williams

Thought of the Day
“The Future – Opposing Views”
December 8, 2011

We are battered daily by reports from the Press of the inevitable decline and decay of the American system. The American century – the twentieth century – has vanished, and it is the planned, mercantilist economies, especially China, that are seen as the future. Income inequality, a stagnant middle class, political gridlock, a deep and prolonged recession are offered as a manifestation of the failure of American capitalism.

In contrast, China is suggested as the future: A state, governed by a small coterie of elite with little diversity to its population, which is now in decline. It is a state that does not abide international laws, that censors its media, has little or no transparency and whose people are not free to dissent, and who suffer inequality on a scale inconceivable to Americans. Yet, because its highways are new, its airports shine in the smog-infested air and its trains run at far higher speeds than ours, it is cited by those who would have state-dominated industries as the wave of the future.

Two recent op-ed pieces perfectly portrayed these very different views of our future. One puts its trust in the state; the other in the individual. The first, written by Andy Stern, appeared in the December 1 issue of the Wall Street Journal. Not surprisingly, Mr. Stern, as the former president of the Service Employees International Union (SEIU) argues that our free market capitalism is losing ground to the planned economy of China. His piece portrays a deep distrust for free markets and makes absurd comments such as “while China is making five-year plans for the next generation, Americans are planning only for the next election.” The statement shows a complete misunderstanding as to the fact that thousands of entrepreneurs in the private sector spend their days, not worrying about the next election, but thinking of the next I-Pad, or the next Wal-Mart. He writes that “countries need to become economic teams” and that “job creation must be the number one objective of state economic policy.” While there is no question that jobs are needed – though I might add there are jobs going begging in the village of Vail, Colorado where I am writing this – it is the private sector that does the hiring. Government needs to create the right tax incentives and regulatory environment to permit our entrepreneurs to compete in the global economy. (One has only to compare the U.S. Post Office with Federal Express and UPS to understand the differences between state run enterprises and private ones.)

The second piece, entitled “What America Does Best” , was written by Victor Davis Hanson on November 14 in National Review Online. Mr. Hanson points out that the country has been through such periods in the past. He cites the fact that the Soviet Union attracted many liberals, like Walter Lippmann who viewed the Communist experiment in Russia as a success; that it treated people more equitably. Similarly, German nationalism in the 1930s, as the United States still struggled with the Depression, was held up as a standard to be emulated by people like Democrat Joseph Kennedy and conservative, Anne Morrow Lindbergh. Both countries were seen to be led by an enlightened elite, in both business and government. Efficiency was deemed more important than the rights of individuals. As hard as it is to believe today, Communism, Nazism and Fascism were seen by many otherwise intelligent people, on the left and on the right, as the wave of the future. Nationalism trumped individual freedom. But all three forms of government died well-deserved deaths.

In the 1980s, “Japan, Inc.,” became, Mr. Hanson writes, “the next new paradigm of the post-American world…American ‘experts’ lectured us on the need to adopt Japanese-like partnerships between corporations and government.” Today Japan, after two decades of stagnation and a stock market that remains 75 percent below its peak, is no longer considered the model we should follow. Now, we are told by those like Mr. Stern, that China is the next replacement for America!

Truly enlightened men and women who know and understand history realize that societies that empower government over the rights of individuals are doomed to failure. Seventy-eight years ago, according to Erik Larson in his book, In the Garden of Beasts, the then U.S. Ambassador to Germany (and historian), William Dodd spoke at the Adlon Hotel: “…no system which implies control of society has ever ended in any way other than collapse.”

Crises are seen by some as opportunities to advance their political leanings. On Tuesday, President Obama speaking in Osawatomie, Kansas (in the same city and on the 100th anniversary of a similar populist speech by President Theodore Roosevelt,) called for a “new nationalism” – a word with mixed, and dangerous, historical connotations. His rhetoric is populist and divisive. Like others before him, he has sought and found someone to blame for the financial collapse and the ensuing recession – “millionaires and billionaires.” He numbingly keeps repeating the mantra, in a manner reminiscent of power-hungry leaders who have preceded him. For Lenin, it was the aristocrats; for Hitler, it was the Jews. In his speech in Kansas, Mr. Obama declared the 2012 election to be a “make or break” moment for the U.S. middle class. He is right. The election does seem a make or break moment. Either the country acknowledges the factors that created our fiscal and financial problems – an irresponsible use of debt, by consumers and speculators, encouraged by a government exhibiting a moral laxity – and addresses the root cause, or we continue on a path toward socialism.

The President, in 2008, campaigned on a promise of hope and change. Instead, he has delivered despair, and the change he has brought forth has been nothing more than an expansion of government. Keep in mind, any change that diminishes the individual and strengthens the state is alien to our concept of freedom.

There are two views out there: One suggests that people need a more protective and omnipotent government; the other believes that individuals should be free to make their own choices, taking personal responsibility and being rewarded when successful. A society, of course, cannot function without government. The debate is about how big a role government should play in our lives. It is the optimist that believes in the people, while it is the pessimist who feels dependent on an all powerful state. What every American should always remember is that every public servant, including the President, is the employee of our humblest citizen.