Wednesday, August 31, 2011

"Germany Shutters Nuclear Plants - The Start of a Trend?"

Sydney M. Williams

Thought of the Day
“Germany Shutters Nuclear Plants – The Start of a Trend?”
August 31, 2011

The fallout from Japan’s March earthquake is being felt across the developed world. The meltdown at Japan’s Fukushima’s nuclear plant has generated a re-thinking of nuclear power. Germany recently announced that they would be shuttering eight of their seventeen plants, with plans to close the other nine over the next ten years. While such moves are not unexpected given the severity of the damage in Japan – uranium stocks, for example, are down between forty and sixty percent year-to-date – it is a surprise that Germany, a world leader in renewable sources for energy, plans to completely vacate the nuclear power generation business. The economic impact could be substantial.

Germany, today an exporter of energy, plans to replace the roughly 25 gigawatts those nuclear plants produce with 23 gigawatts of gas and coal-fired plants by 2020. German law, according to an article in yesterday’s New York Times, requires that renewable energy be purchased first, even when it is more expensive, raising questions as to the viability of any new fossil fuel-powered plants.

The Japanese earthquake and ensuing tsunami last March, with their devastating effects on the Fukushima nuclear facilities, rattled the global nuclear power industry. Japan is a technologically advanced country, so that meltdown was more alarming to the developed world than the Chernobyl disaster of 1986. Reports that last week’s 5.8 magnitude earthquake in Virginia may have caused Dominion Resources’ North Anna nuclear power station to sustain “shaking that exceeded levels for which it was designed” only heightened the fears of those who already view nuclear power with skepticism. The accident and core meltdown at General Public Utility’s Three Mile Island thirty-two years ago was the reason no new nuclear facilities have been built in the U.S. since 1977. Nevertheless, 20% of U.S. electricity generation is nuclear derived.

According to Wikipedia, thirty-two countries have nuclear power generating facilities, collectively producing 14% of their supply. Five of the ten largest economies in the world – the U.S., Japan, Germany, the U.K. and France – generate between 18% (U.K.) and 75% (France) of their electricity production with nuclear plants. (Japan’s nuclear powered electricity generation is expected to be at 20% this fall, down from 29% before the tsunami.)

For years, countries have debated the merits of nuclear-powered electricity generation. Three years ago the Wall Street Journal had a front page article: The Case for and Against Nuclear Power.” Arguments were pretty obvious. Proponents argued, “We have no choice.” “Nuclear is a necessary alternative in an energy-constrained world…the economies make sense.” They pointed out that about a third of greenhouse gas emissions resulted from burning fossil fuels to produce power. Opponents argued that “the costs were way too high to justify the safety hazards, as well as the increased risks of proliferation.” The Fukushima incident added weight to the opponent’s view.

Certainly the events in Japan will not hasten the proliferation of nuclear power plants, except perhaps in Iran, which has other motives. However, it remains unclear whether the rest of the developed world will follow Germany. France, for example, would have a hard time abandoning their dependency on nuclear. But one could certainly expect a moratorium.

While growth in wind farms may gain attention, their costs and land usage is not insignificant. At Al Gore’s Solution Summit in January 2008, the former Vice President suggested that producing one million megawatts (about one quarter of U.S. consumption) would (only) require 3% of the land area in the “lower 48.” As the contiguous states consist of about two billion acres, Mr. Gore was speaking of about 60 million acres – about the size of Georgia. Alternatively, it has been suggested installing wind turbines off the east coast of the United States. The eastern coast of the U.S. is about 1500 miles long. According to Kurzweil Accelerating Intelligence, it takes about 333,000 wind turbines to generate a million megawatts. That would suggest the need for 222 turbines every mile, again a highly unlikely prospect.

Forty-four percent of the generation of electricity in the U.S. today comes from coal; twenty-three percent from natural gas and twenty percent from nuclear. Should nuclear decline, the question becomes which fuel will be the winner. The most obvious beneficiary would appear to be nuclear’s dirtier cousin – natural gas. It is a fuel in plentiful supply in the U.S., especially in shale formations. While environmentalists have raised concerns about hydraulic fracturing polluting water supplies, the burning of natural gas emits substantially less carbon dioxide than coal or oil. There are those who have looked upon natural gas as a “bridge” connecting environmentalists to the power generation business. It has become, in the words of Herman K. Trabish who writes for NewEnergyNews and, “the pivot point around which the energy debate revolves today: cheap gas means renewables struggle, but no gas means more coal.”

Even if the United States does not shutter any nuclear plants, it is hard to see the field expanding in line with GDP growth. While it is hard to imagine the rest of the world taking its lead from Germany, in this instance, it does seem there will be a lid on growth. It is also a setback to those who saw nuclear as a means of reducing carbon’s footprint. The shuttering of Germany’s plants is a reminder of the cost of environmentally-pure economies. They are a privilege of the wealthy. The developing world, not surprisingly, is first concerned about living – food, clothing and shelter. Today, their economies are gaining on ours. We, to remain competitive, will have to focus more on creating wealth than spending it. That may mean compromises in terms of adhering to strict regulation – a situation not yet realized by the current Administration that yesterday mentioned seven pending federal rules, each with economic costs in excess of a billion dollars. An increase in the costs of electricity only adds one more hurdle for business.

Tuesday, August 30, 2011

"Government - What Sort of Government Do We Want?"

Sydney M. Williams

Thought of the Day
“Government – What Sort of a Future Do We Want?”
August 30, 2011

If and when Washington gets its fiscal house in order, the ensuing debate should not be limited to tax increases and spending cuts. Tom Friedman, in his Sunday’s column in the New York Times argues for a new, hybrid politics that “mixes spending cuts, tax increases, tax reform and investments in infrastructure, education, research and production.” In my opinion, the debate must be even more fundamental. What services do we want government to provide and how much do we want to pay?

U.S. federal spending, as a percent of GDP, ranged between 18% and 22% for the forty years ending 2007 – a period that included half a dozen recessions, two of them severe. In 2010, that number reached 24.8%, the highest level since World War II. Away from the obvious spending programs of the Obama administration, there are two other explanations. First, the recession ending in May 2009 is generally considered the most severe in the post war period. Second, GDP growth during the 2000s was unusually slow, while government spending continued apace. Between 1970 and 2000, growth in government spending virtually matched growth in GDP. During the 2000s, GDP growth was 46% while government spending expanded 100%. (In fairness, GDP growth fell off sharply during the December, 2007-May, 2009 recession, while government spending increased dramatically, led by TARP and the “Stimulus.”

Among the questions investors and voters are attempting to determine is do the policies of the Obama administration represent a sharp divergence from the past, or are they only temporary? Over the past seventy-five years, voters have indicated a preference for providing increased social services in the form of Social Security, Medicare, Medicaid, unemployment insurance, etc. Because of demographic shifts, the cost of some of those services is rising faster than inflation and/or GDP growth. Those costs increases are embedded into current models and will persist. In 1960, there were 5.1 workers for every retiree. In 2009, there were 3.0. We are an aging nation. The median age in the U.S. is just over 36 years today, up about a year in the past decade. (I might note that the Williams’ family, with an average age of 26.2, is making a stab at bucking that trend.)

Reflecting this trend, the composition of the budget has changed. Discretionary spending, as a percent of the federal budget, is about 39%. Forty years ago it was around 67%. With Vietnam, defense spending in 1970 was 50%; today it is 20%.

The fact is we are a different country today than forty years ago and there is no going back to the way we were. Change is difficult; there are those who would like to slow the pace, and almost everyone realizes that the current trend leads inexorably to bankruptcy. Any solution will be painful, which explains the reluctance of politicians to be bearers of bad news. It also explains, in part, the virulent antipathies of the various political combatants – the polarization of extremists in Congress. Americans are frustrated because the stakes are so high and because of the failure in Washington to deal with intractable problems.

Americans are asking questions: what do we want our country to be and how do we get there? What will the costs be, both in dollars and in personal freedoms?

The tendency of politicians is to gloss over problems, hoping they disappear – at least beyond the next election. But action is needed now and there are things that can be done today. The age to receive Social Security and Medicare should be raised for those under fifty or fifty-five to seventy, not in fifty years, but in ten or fifteen. A means test should be imposed immediately and the level of income on which the payroll tax is applied should be increased. Tax reform should simplify the code by eliminating numerous popular deductions; it should broaden the base and lower nominal rates. I, and I suspect others, find it appalling that the sanctimonious Warren Buffett, after chastising government for not raising his tax rates (and that for others of the “rich”), concludes an agreement with Bank of America that permits him to receive $300 million in annual dividends while paying a maximum tax rate of 10.5%! Other actions could be taken. Alan Kreuger, the Princeton economist President Obama has chosen to be chairman of the Council of Economic Advisors, concluded in 2008, according to the Wall Street Journal, that “job search is inversely related to the generosity of unemployment benefits.” Those benefits have already been extended to ninety-nine weeks. Should they be extended further or curtailed?

The best way to get out of the mess is to increase GDP growth. Everybody knows that, but the philosophies are at odds. Should government take the lead or should private enterprise? If it is the latter, government must ease up on regulation and must foster free trade.

The aging problem is real, but it is a far bigger problem in Western Europe, Japan and even China. There are two ways of solving it – killing off the elderly, or increasing the number of children. Naturally, I am not in favor of the former; the latter could be solved in two ways – increasing immigration and encouraging larger families.

The change in the federal government’s budget is indicative of the change sweeping our country. Left unaltered, we are headed in a direction that leads to destruction. The debate is about how sharp a reversal is needed – a real concern for investors and voters alike, while politicians, focused on the next election, keep kicking the bucket down the road. It is little wonder that partisanship is so high. It would be nice if we could assume the civility Mr. Friedman prefers. However, we must decide, as a nation, what sort of a future we want. In the same issue of the Times, Richard Thaler asks the more pertinent question: can politicians who act like adults win elections?

"Irene - First, Anticipation and Then, Her Power"

                                                                                       Sydney M. Williams

                                                                                       August 29, 2011

Note from Old Lyme
“Irene – First, Anticipation and Then, Her Power”
“The wind shows how close to the edge we are.”
                                                                            Joan Didion (1934 -) Author

Friday was eerie. The day was warm – perhaps a little too humid – with a clear blue sky. But the knowledge that a major storm was approaching cast a foreboding tone. The waves were a little rougher than usual – the normal green flag had been replaced by yellow – but still OK for my grandchildren who kept dashing into the waves and then letting the water carry them back onto the beach.

Nevertheless, with Irene approaching, the decision was made that afternoon to close the club for the weekend, an obvious decision as Governor Christie had mandated an evacuation of the entire New Jersey coast.

There is a sense of helplessness one feels when confronted with a storm like Irene. Bicycles and toys are stored. Porch, terrace and pool furniture moved under cover, shutters tightened, plate glass taped and cars placed in garages. But one’s house remains exposed, as do the trees that have stood for decades providing shade in the summer and protection from nosy neighbors year round. It is difficult, if not impossible, to be assured that shingles will not be torn from the roof by wet, wind-blown gusts approaching 100 miles an hour. Friday was, as the saying goes, the calm before the storm.

For the past thirty-odd years, we have rented a house during the month of August in the town of Rumson, N.J. where my wife spent her summers growing up. The house we were in was a wonderful old house built around the turn of the previous century, located about a half mile from the beach. There was no concern of the ocean breaching the area, as the land was high and Rumson is separated from the ocean by the Shrewsbury River. There was, however, a concern – a concern that was realized – of losing power.

So late Friday we made some decisions. My son and his family would return to Connecticut; Caroline would stay with a childhood friend who possessed a generator; I would return to New York.

But it was the eeriness of the calm on Friday, mimicked in the stillness of the air that riveted my attention. Such reactions are not uncommon when impending storms approach – even those that are man-made. French nobles in the late 1780s had to know they were unpopular with le public, as did aristocrats in Tsarist Russia, in the months leading up to the revolution of 1917. In the months leading up to the credit crisis in 2007-2008, market volatility dropped and a sense of complacency descended on Wall Street, undetected by all but a few.

However, it is the indiscriminate power that characterizes nature that instills an innate sense of fear. Storms such as Irene cannot be harnessed; we cannot alter their direction; a single storm possesses more energy than man has been able to muster since he exited the cave. They attack rich and poor, black and white, Muslims and Christians – they show no quarter, heed no master and abide by no rules man has created.

We sat on the beach on Friday, realizing Irene was coming and that Americans would die because of her, yet knowing we were powerless to stop her. Irene is just one more reminder of man’s insignificance in nature’s larger scheme. One is reminded of the Earl of Gloucester in the first scene of Act IV of King Lear:

“I’ th’ last night’s storm I such a fellow saw
Which made me think a man a worm. My son
Came into my mind, and yet my mind
Was then scarce friends with him. I have heard more since.
As flies to wanton boys are we to th’ gods;
They kill us for their sport.”

Sitting alone in my apartment surfing channels on Saturday afternoon it was readily apparent that Mr. Bloomberg’s failure to prepare for the big blizzard last December would not be repeated as Irene roared north. The lesson had been learned. It is better to be over prepared than under. Mayors and governors outdid one another in ordering mandatory evacuations. People in low lying areas were inconvenienced, but caution proved successful in that human tragedies, throughout the path of the storm, were limited. Any death is to be regretted, and certainly the twenty or so whose deaths were attributed to Irene are mourned. But when one considers that the sweep of this storm, with its 500 mile wing-span, affected 65 million people, the loss of life was minimal.

(My personal highpoint on Saturday was seeing on ABC News four of my grandchildren sitting in their minivan, as their mother, my daughter-in-law, was interviewed on their return to Connecticut from the New Jersey shore.)

Man has the ability to forecast and track hurricanes, but we cannot divert them. But anticipation saves lives, as happened in this instance. In contrast, there was little preparation for the infamous Hurricane of ’38, which hit Long Island with winds of 115 miles per hour, and then swept across New England, seventy-three years ago. That storm, admittedly larger, caused 682 deaths.

As Irene passed overhead on Sunday, the sun reappeared briefly, prior to sinking into the west. That reappearance was like an apology for the inconvenience she had caused, but the message remained clear: no matter what technology we create, no matter what pollution we generate, or what weapons we develop nature is bigger than any of us, individually or collectively. It is a sobering thought.

Monday, August 29, 2011

"Florida's Coming Insurance Hurricane - Lessons for Healthcare"

Sydney M. Williams

Thought of the Day
“Florida’s Coming Insurance Hurricane – Lessons for Healthcare”
August 29, 2011

Whenever government intervenes into the free markets’ natural method of determining price, unintended consequences can ensue.

In 1993, a year following the $25 billion devastation caused by Hurricane Andrew, insurance companies attempted to raise prices. Premiums based on previous actuarial tables proved inadequate. The insurance industry is profit-driven; they are not eleemosynary organizations. Competition keeps them honest. Following Andrew, Florida state insurance regulators demurred when it came to granting higher rates; thus were born the Florida Hurricane Catastrophe Fund, a reinsurance company, and the Florida Citizens Property Insurance Corp., both state backed businesses.

The “Cat Fund,” as the reinsurance company became known, is funded by premiums charged to participating insurance companies, by investment income (they currently have $7.3 billion in liquid assets,) by the ability to issue bonds. Taxes on insurers would pay for the bonds. Of course if it is unprofitable to write insurance, private companies simply won’t do so. As the Wall Street Journal put it in an editorial on Saturday, “The fund was supposed to be a safety net, not a reinsurer of last resort.”

Over the past few years the Cat Fund has grown, first because of its pricing advantage – this is a state owned fund, meaning that there are built-in expectations that shortfalls can be made up through bond issuance and taxation – and second because the state mandated that all property and casualty companies operating in Florida purchase reinsurance from it. Former governor, Republican Charlie Crist elevated the risk to taxpayers in 2007 when he raised the Cat Fund’s cap. Citizens has grown because, like the Cat Fund, its rates are set by law below those of its private competitors – virtually assuring it will operate at a loss.

One of the great ironies of the situation in Florida is that many of the coastal homes are owned by the wealthy. The fact that some, if not all, of their home property insurance costs are subsidized by taxpayers seems inherently unfair. Eli Lehrer, a vice president of the Heartland Institute, has written that “a prohibition of state subsidies for building in environmentally-sensitive, hurricane-prone areas would help reduce insurance rates while making residents safer.” That sounds sensible.

Floridians, though not politicians, are beginning to acknowledge the potential risks. The Journal’s editorial quoted Jack Nicholson, Chief Operating Officer for the Cat Fund: “We would like to be able to say to the legislature that we can pay 100% of our losses, regardless of what happens. Right now we can’t honestly say we can.” The CFO of Citizens, Sharon Binnum, appears equally aware of the problem. She indicated that in the event of losses, and the Cat Fund is unable to make up losses incurred by Citizens, “taxpayers would take a double hit – first to shore up the Cat Fund and then to shore up Citizens.” However, a bill to reform Citizens by raising rates and re-invigorating competition died at the hands of Republican Mike Fasano, and a populist scare campaign.

Newly elected Governor Rick Scott has thus far failed to tell the public the bad news – higher rates and more private insurers are needed. Mr. Lehrer suggests a compromise: “The legislature should take a middle course and work to shrink Citizens 60% over four years. That would cut the potential liability imposed on taxpayers.” The sooner the state acts the better. Florida largely escaped Irene, but there is no assurance she will elude the next one. The ones who will be dinged are Florida residents and tax payers.

Charlie Crist, when he was governor, simply wanted to pass the hot potato to Washington. His concept was to have the federal government establish a disaster fund, from which Florida and other states could draw. That may sound like a good idea in theory, but in practice passing the buck does not solve the problem, and it discourages commonsensical behavior?

The situation in Florida is symptomatic of a bigger problem facing our country. Increasingly, government has assumed responsibility for the negative outcomes of the personal actions of its people – the best example being the mortgage market. Wall Street, in the aftermath of the credit crisis and with the creation of TARP, was accused – rightly, in my opinion – of a “heads I win; tails, I don’t lose” attitude. Unfortunately that perspective has permeated our society. One of the more debilitating consequences of a paternalistic government is that the people become used to looking to Washington to cure all ills. Until our society has been re-instilled with a sense of personal responsibility, it is difficult to see it achieving its past successes.

Government does have a role. Repairing harbors, roads and bridges resulting from storms such as Irene can only be handled by government. But people who build in disaster-prone areas, against the advice of authorities, should assume personal responsibility for the costs they incur. Why should the prudent pay for the excesses of the prodigal?

Florida did escape Irene, but there will be others. Despite the promises of politicians, there is no such thing as a free lunch. Somebody has to pay. The Cat Fund and Florida Citizens Property Insurance Company raise the question: who is better at setting prices – the market or the government? The answer to that question has implications for other government programs, including the Patient Protection and Affordable Care Act, which will likely be next in the docket.

Friday, August 26, 2011

"Confidence - Buffett Helps, But Still Missing in Washington"

Sydney M. Williams
Thought of the Day
“Confidence – Buffett Helps, But Still Missing in Washington”
August 26, 2011

Mr. Bernanke will speak this morning from the beautiful peaks of Jackson Hole to a depressed Main and Wall Street – already skittish about sending good money chasing bad – who are now, at least on the East Coast, bracing for the unwelcome arrival of Irene.

With rates as low as they are, it seems to this uneducated observer than any further easing would be equivalent to pushing on a string. Bank liquidity is not the problem it was in 2008. Corporations are sitting on mounds of cash – an estimated $1.2 trillion. It has been uncertainty that has kept that cash from being invested. With three dissenters at the last Fed meeting, it seems unlikely that Mr. Bernanke will implement a QE 3, but one never knows. However, the Fed could certainly stop paying interest on the excess reserves that banks have housed at the Fed. Those reserves amount to about $1.6 trillion and provide little value to the economy sitting where they sit. The cessation of paying interest by the Fed would incentivize banks to more aggressively increase their loan portfolios.

After the Labor Day holiday the President plans to speak to the nation about his plan to “pivot to jobs.” Does that suggest that jobs have not been in the forefront of his concerns? That’s hard to believe. He has constantly spoken of the need for more jobs. The problem has been that his announced policies have had the effect of reducing confidence among small business owners – the engines of job growth in our economy. Mortimer Zuckerman, in an op-ed in yesterday’s Wall Street Journal, wrote that there are “fewer Americans working full time today than when Mr. Obama took office.” If the President’s speech is going to have a meaningful economic impact he will have to “pivot” from past policies of increased regulation (including healthcare) to one of encouraging government to step out of the way and let business operate more freely – a very unlikely prospect. His words assuredly will be eloquent, but it will be the substance of those words that ultimately will be important.

On the other hand, Warren Buffett’s decision yesterday to invest $5 billion in a Cumulative Perpetual Preferred Stock of Bank of America represented a measure confidence the bank needed. For his investment he receives a six percent coupon, in equal quarterly payments and 10-year warrants to purchase 700,000 shares of common stock at an exercise price of $7.142857. The bank retains the right to redeem the preferred at any time at a five percent premium. I have no ability to determine the financial condition of any bank, let alone a bank as complex as Bank of America. However, the price of Bank of America declined 24% between August 1st and the 24th. That decline came amidst growing rumors as to the weakness of the bank. Unfortunately with a bank, a declining stock price can become a self fulfilling prophecy. The bank’s equity declines, their cost of capital rises and depositors start pulling money out. Confidence withers. Mr. Buffett is able to command generous terms because of the combination of his reputation and pocket book and the times when he chooses to invest.

It is easy to criticize Mr. Buffett for the terms he is able to extort, but investors should consider the alternative. Would the financial system be better off if Bank of America failed? Mr. Buffett’s investment is no guaranty that Bank of America will not fail, but it is a vote of confidence. And the world’s commercial, banking and credit systems are based on confidence. What lifts confidence is good; what lowers it is bad.

Sydney M. Williams
Thought of the Day
“Confidence – Buffett Helps, But Still Missing in Washington”
August 26, 2011

Mr. Bernanke will speak this morning from the beautiful peaks of Jackson Hole to a depressed Main and Wall Street – already skittish about sending good money chasing bad – who are now, at least on the East Coast, bracing for the unwelcome arrival of Irene.

With rates as low as they are, it seems to this uneducated observer than any further easing would be equivalent to pushing on a string. Bank liquidity is not the problem it was in 2008. Corporations are sitting on mounds of cash – an estimated $1.2 trillion. It has been uncertainty that has kept that cash from being invested. With three dissenters at the last Fed meeting, it seems unlikely that Mr. Bernanke will implement a QE 3, but one never knows. However, the Fed could certainly stop paying interest on the excess reserves that banks have housed at the Fed. Those reserves amount to about $1.6 trillion and provide little value to the economy sitting where they sit. The cessation of paying interest by the Fed would incentivize banks to more aggressively increase their loan portfolios.

After the Labor Day holiday the President plans to speak to the nation about his plan to “pivot to jobs.” Does that suggest that jobs have not been in the forefront of his concerns? That’s hard to believe. He has constantly spoken of the need for more jobs. The problem has been that his announced policies have had the effect of reducing confidence among small business owners – the engines of job growth in our economy. Mortimer Zuckerman, in an op-ed in yesterday’s Wall Street Journal, wrote that there are “fewer Americans working full time today than when Mr. Obama took office.” If the President’s speech is going to have a meaningful economic impact he will have to “pivot” from past policies of increased regulation (including healthcare) to one of encouraging government to step out of the way and let business operate more freely – a very unlikely prospect. His words assuredly will be eloquent, but it will be the substance of those words that ultimately will be important.

On the other hand, Warren Buffett’s decision yesterday to invest $5 billion in a Cumulative Perpetual Preferred Stock of Bank of America represented a measure confidence the bank needed. For his investment he receives a six percent coupon, in equal quarterly payments and 10-year warrants to purchase 700,000 shares of common stock at an exercise price of $7.142857. The bank retains the right to redeem the preferred at any time at a five percent premium. I have no ability to determine the financial condition of any bank, let alone a bank as complex as Bank of America. However, the price of Bank of America declined 24% between August 1st and the 24th. That decline came amidst growing rumors as to the weakness of the bank. Unfortunately with a bank, a declining stock price can become a self fulfilling prophecy. The bank’s equity declines, their cost of capital rises and depositors start pulling money out. Confidence withers. Mr. Buffett is able to command generous terms because of the combination of his reputation and pocket book and the times when he chooses to invest.

It is easy to criticize Mr. Buffett for the terms he is able to extort, but investors should consider the alternative. Would the financial system be better off if Bank of America failed? Mr. Buffett’s investment is no guaranty that Bank of America will not fail, but it is a vote of confidence. And the world’s commercial, banking and credit systems are based on confidence. What lifts confidence is good; what lowers it is bad.

Thursday, August 25, 2011

"Defense - There is no Such Thing as Permanent Balance"

Sydney M. Williams

Thought of the Day
“Defense – There is no Such Thing as a Permanent Balance”
August 25, 2011

Things never remain the same. We age. Man travels by foot in one century and by spaceship in the next. Empires, from Rome to Great Britain, have risen and fallen. During the post World War years, the military might of the United States (the “Inevitable Empire,” according to George Friedman of Stratfor) allowed Western Europe and Japan to grow their economies with little concern for defense. With the collapse of the Soviet Union, America stood alone as policeman of the world. All that is changing.

Earlier this month the “Shi Lang” was launched at Dalian Harbor, becoming China’s first aircraft carrier. The “Shi Lang” is the refurbished Russian carrier, “Varyag”. According to the Chinese official news agency, Xinhua, the 984 foot, 67,500-ton ship sounded its horn three times, as it plowed through the fog and made its way through the harbor.

China’s military prowess is being seen in other venues. Four years ago China shot down a satellite, signaling their prowess in space. Carrier-based missiles mean that U.S. Naval air power would be pushed further into the Pacific. In the next few weeks, China is expected to take its first major step towards building a Space Station, which is expected to be completed in 2020 just as the International Space Station is being decommissioned. Yesterday’s Wall Street Journal carried an op-ed by Michael Auslin, director of Japan studies at the American Enterprise Institute, which spoke to the growing threat from China’s Air Force. Earlier this year China flew a prototype of its fifth generation stealth fighter, the J-20, just as the U.S. was cancelling the F-22 and while the F-35 becomes increasingly expensive and remains behind schedule. The People’s Liberation Army includes about 2.25 million active members. China’s military spending continues to grow. Ours risks stagnating.

The question, as raised by Peter Foster writing in the Daily Telegraph, do these activities “portend America’s gradual slide and China’s inexorable rise?”

The United States today spends approximately 25% of its budget on defense, between 5% and 6% of GDP. Given U.S. budget constraints, that number, as a percent of both budget and GDP, is likely to decline. China’s military budget is unknown. Their government’s published military budget is about $91.5 billion for 2011, while the U.S. Department of Defense estimated China’s 2009 military spending to be $150 billion, or about 2.5% of GDP. Most people suggest that public numbers understate true spending. To put those numbers in perspective, other than the UK and Russia, no West European country spends more 1.8% of GDP on defense.

China’s neighbors are nervous of her growing military power and the influence that brings. India, while having three carriers, spends about one fifth the dollar amounts as does China. Japan spends a little over $50 billion, about 1% of GDP. Japan also has three carriers and an ally in the United States, as does India. SEATO was dissolved in 1977; nevertheless, the U.S. maintains interests in the area. The Chinese, despite the years that have passed, surely remember the Rape of Nanking. That massacre in December 1937, which killed 300,000 of the city’s 600,000 inhabitants, is generally considered the single worst atrocity, in any theater, during World War II. India, which spends about 1.8% of GDP (or $36 billion) on defense, worries about China’s having constructed ports in Burma, Sri Lanka and Pakistan. The Indian Ocean is important to China as they have a need to protect their nation’s trade with a growing number of African and Middle East nations.

Smaller nations are also wary of an expanding China. The countries of South East Asia have a combined population of about 550 million. The Straits of Malacca, separating Malaysia from Indonesia, act as a gateway between the Indian Ocean and the South China Sea. Other choke points include the Lombok Straits and the Sundu Straits. China could declare a naval quarantine in any one of these places and enforce it with tactical naval power. Vietnam, the Philippines and South Korea may have to bend to the will of their more powerful neighbor. Sea lanes traversing the region carry 50% of global trade and 33% of the world’s oil. The conquest of Taiwan (seemingly inevitable) might embolden America’s Western Hemisphere’s enemies, like Cuba and Venezuela.

In the meantime the United States is stretched, both financially and militarily. We may not be on decline on an absolute basis, but we certainly are on a relative basis. We have interests in the area – allies to support, as well as protection for the merchant ships that carry our goods in trade. Annual GDP growth in the U.S., over the next few years, is unlikely to exceed 3%, while China’s will be in the high single digits. Our GDP is almost three times theirs’, but that gap is narrowing. It does not stretch the imagination to conceive of China’s military spending overtaking that of the U.S. in ten or fifteen years.

No one can say what the future holds, other than to say that the balance is shifting and that the direction is inexorable. The biggest unknown is the rate of decline of our relative strength. The most important achievement of the dishonored President Nixon was to open talks with China. That relationship has become more complex in the almost forty years since his visit, as China has become our second largest trading partner and our largest creditor. The region is rich in commodities and in consumers for our products. Among the many critical roles for our President is to keep those lines open.

Changing dynamics within the world, whether military, economic or diplomatic are reasons why life is so fascinating, so difficult to decipher and so challenging. What we deem to be balanced today will surely be out of kilter tomorrow.

Wednesday, August 24, 2011

"Eliminating Red Tape for Small Business? Not Much."

Sydney M. Williams

Thought of the Day
“Eliminating Red Tape for Small Business? Not Much”
August 24, 2011

We should always be appreciative of small favors, even when the packaging is a little misleading. Yesterday the White House announced plans to scale back regulation on small businesses. Cass Sunstein of the OMB trumpeted the news in an op-ed in yesterday’s Wall Street Journal, “Washington Is Eliminating Red Tape.” According to the Journal, the Administration expects savings of more than $10 billion over five years. “The changes are welcome, but don’t appear to go far enough,” said Bill Kovacs, of the U.S. Chamber of Commerce. It would seem he is correct. A 2010 study by the Small Business Administration (SBA) concludes that the annual cost for the private sector to comply with current federal regulations exceeds $1.75 trillion. An annual savings of $2 billion is less than one tenth of one percent – something, but not much. reports that regulatory agencies have seen their combined budgets grow 16% since 2008, while GDP has grown 5%. According to a study by the Heritage Foundation, a conservative think tank, 75 major regulations have been enacted since Mr. Obama became President, costing $38 billion annually, nineteen times projected savings. That number does not include costs of adhering to the provisions of the Patient Protection and Affordable Care Act. Between October and March of this year, according to Brian Koenig writing in, 1,827 rulemaking procedures were completed, many of them minor, but fifteen of them major with combined annual costs of $5.8 billion, almost three times the annual savings announced with such fanfare by Mr. Sunstein yesterday.

What constitutes a small business depends on the line of business. For example, manufacturing, according to the SBA, can include a company with 1,500 employees. In retailing or services, small businesses sales should not exceed $21.5 million. There are about 30 million small businesses in America; they are critical to GDP, producing more than half of non-farm private GDP. According to the U.S. Department of Commerce, small businesses employ just over half of all private sector employees and have generated 64% of net new jobs over the past fifteen years.
The Administration’s plan, which would effectively roll back a mere 5% of the major regulations they have announced, would cover a “wide span” and is “unprecedentedly ambitious,” wrote Mr. Sunstein in his op-ed. But he was also quoted by Laura Meckler in the same issue of the Wall Street Journal (but in a different article) as saying the Administration is also applying stricter standards for new regulations. Will the real Mr. Sunstein please stand up?

Recently I received an e-mail from a friend who owns two small manufacturing plants, one in Missouri and the other in Wisconsin. In turn, he had received e-mails from two friends, both of whom are small manufacturers. None of the three are as large as a small division of General Electric. Their complaint had been that while the President purports to be concerned with the fate of small businesses and the jobs they create, he uses GE’s CEO, Jeffrey Immelt as his advisor on job creation. On July 25th, GE announced that they were planning to move their 115-year-old X-ray division from Waukesha, Wisconsin to Beijing. My friend writes: “In addition to moving the headquarters, the company will invest $2 billion in China and train more than 65 engineers and create six research centers. This is the same GE that made $5.1 billion in the United States last year, but paid no taxes – the same company that employs more people overseas than it does in the United States.”

My friend adds that he doesn’t care where GE takes their jobs. They must act in the best interest of all their constituents, including shareholders; he says he and these small business owners feel insulted by the example of big government and big business colluding in a patronizing manner and misleading the American people. Jeffrey Immelt and Warren Buffett are very accomplished and talented individuals, but they do not represent small business, nor are they familiar with the environment in which small business must operate today.

The costs of adhering to myriad regulations do not include the cost for businesses of dealing with the National Labor Relations Board (NLRB.) For example, by holding up Boeing’s plan to open a second assembly line in South Carolina, the NLRB is distinctly hampering employment. In response to a question as to whether he would interfere, the President demurred, saying that his hands are tied; the NLRB is an “independent agency.” That may well be true, but as Joe Nocera pointed out in yesterday’s New York Times: “…most of its top executives are his appointees.”

Do the Administration’s plans to eliminate or cut back hundreds of regulations signal a changing environment in Washington? We’ll see. Any diminution of red tape is welcome and a significant change would be very positive – but I wouldn’t bet on it.

Tuesday, August 23, 2011

"Volatility - Does it Spell Opportunity?"

Sydney M. Williams
Thought of the Day
“Volatility - Does it Spell Opportunity?”

August 23, 2011

“In the short run the market is a voting machine, but in the long run it is a weighing machine.” Those wise words of Benjamin Graham are worth recalling, as short term downward volatility has spooked investors into believing there is no long term. There are those who argue, at times like these persuasively, that the long term is nothing more than the culmination of a series of short term moves – why worry about tomorrow when today’s concerns are so paramount? Technical analysis often employs similar trends to determine future price moves. But the truth is that there is no magic elixir that unlocks the prospects for the future. Trends cease and tomorrow arrives.

The “voting machine” referred to by Professor Graham includes components of behavioral finance, money flows, sentiment, daily news bulletins, etc. This is the model used by traders and most quants, some of whom have been very successful, but more of whom have not. A “weighing machine,” on the other hand, assesses the present worth of a company based on discounted cash flows: it is an attempt to determine the intrinsic value of a company (an imperfect analysis, as it depends upon guesswork for future interest rates and company growth rates.) Patience and volatility then allow the investor to buy the stock below intrinsic value. Of course stocks can trade substantially below intrinsic value, but the concept is based on the expectation that everything eventually sells at its “true worth.” “Eventually,” however, is an indeterminate period of time. The point is that there are no easy answers. High frequency traders, in an attempt to quantify what is essentially a qualitative process, have recently proliferated. TV market commentators, each claiming to understand that which they do not, add to the din and confusion. In these unfriendly skies, the best chance most investors have is a sense of perspective, an understanding of history and the willingness and ability to determine a security’s intrinsic value.

The first fifteen trading days of August have equaled the combined volatility (in terms of the Dow Jones being up or down days more than 1.5%) of the first seven months of this year. On six of those days the market has been down more than 1.5% and on three days it has been up more than that level. The last time the market showed this much volatility was in the early months of 2009. March, the bottom of the market, had eleven such days. The record over the last few years was October 2008, when the market had eighteen such days (out of twenty-three trading days.)

For reasons I cannot explain, volatility has been more associated with market lows than tops. In the two months leading up to the market peak on October 9, 2007, there were five days in which the Dow Jones Averages traded up or down more than 1.5%. In contrast, in the two months prior to the market hitting its low on March 9, 2009, there were seventeen such days. In the two months leading up to today, there have been eleven such instances, nine of them in the last fourteen days.

As to whether recent volatility spells opportunity, or if it signifies nothing more than a duplicitous illusion designed to suck in unsuspecting investors, remains to be seen. But perspective is important. A debt-induced recession implies a recovery that must overcome deleveraging, ergo moderate GDP growth at best. So, increasing signs of slow economic growth should be no surprise. Leadership in the Western world, however, as it pertains to economic issues, is distinctly absent. The EU appears more muddled than us, unable to come to grips with what seems to the inevitability of an eventual disunion. It is unclear to me as to whether President Obama’s problem has been an inability to work with a, admittedly, diverse and opinionated Congress, or whether he lets ideology determine his actions. While I suspect the latter, whichever is correct, the affect is the same – an economically ineffectual Presidency. On both sides of the Atlantic there appears little confidence that the West is up to the internal challenges they face, or to the competition that will be coming from the East.

While the U.S. economy is trucking along at a rate barely able to absorb new labor entrants, emerging nations that had relied on the avid appetites of U.S. consumers must now deal with a slimmed down version. Their economies are continuing to expand, but at somewhat reduced rates, as lower exports cannot entirely be offset by increased domestic consumption and continued infrastructure spending. The market surely knows that the U.S. represents about 20 percent of global GDP, and that the consumer constitutes about 68 percent of U.S. GDP, or about 14 percent of global GDP. The American consumer’s retrenchment is significant.

Sharp movements in the market (volatility) provide commentators the opportunity to declaim that the risk trade is on, or it’s off. Their comments are always made in hindsight, so add very little value to investors. But that volatility does add nervousness into the mixture; thus we have seen notable flows out of equity and high yield mutual funds. The corollary is that we have seen inflows into money market funds, negligible yields in Treasury Bills and a Ten-Year Treasury that yields 71 basis points below the average of dividend paying S&P 500 stocks. Cash is plentiful. Banks have $1.6 trillion in excess reserves, and cash on corporate balance sheets represent the greatest percentage of assets in fifty years.

As Professor Graham would say, the market digests this information and “votes.” Investors are then able to benefit from another of his concepts – Mr. Market. Mr. Market, as the professor’s prize student, Warren Buffett has so often explained, is indifferent to exogenous or endogenous forces. He simply offers prices for securities. It is at the sole discretion of the investor, as to whether he or she wants to buy or sell. There is no time limit as to how long one has to wait to see the price one wants. Volatility suggests that among the pitches tossed there will be a few fat ones right over the plate.

Markets such as the one we have been experiencing provide anomalies – unusual instances of what seem to be remarkable mispricings. The most obvious case, in my opinion, is the yield on U.S. Treasuries. The Three-Month Bill currently pays one basis point. The Ten-Year yields 2.09%, not enough to offset current inflation trends. Of the 390 S&P 500 stocks that pay a dividend, the average is currently 2.8%. The yield on all the 500 stocks in that Index is 2.18%. As Birinyi Associates recently wrote, it is rare for the yield on the S&P 500 to be above that of the U.S. Treasury’s Ten-Year. Gold, another haven for investors who are fearful of economic conditions and policy responses, has risen 33% year to date to just under $1900. The value of the gold ETF, GLD, at $78 billion has now surpassed the SPY, the ETF for the S&P 500, raising the possibility that when gold prices do fall, selling by the ETF could accentuate any decline.

The annually compounded twenty-five year price return to the S&P 500 is 6.2%, not far off the very long term average. Markets such as the current one do provide opportunities for long term investors, those who prefer the market as a “weighing machine,” but they need to be ever mindful that the “voting machine” aspect of prices could take markets down further. If stock prices are up this morning solely on the basis that Fed Chairman Bernanke could offer QE 3 at Jackson Hole this week that, in my opinion, would be reason for concern.

Monday, August 22, 2011

"Causes of the Credit Crisis - A Lesson for Today"

Sydney M. Williams

Thought of the Day
“Causes of the Credit Crisis – A Lesson for Today”
August 22, 2011

Gretchen Morgenson concludes her column, “Finger-Pointing in the Fog,” in yesterday’s New York Times, “…we still don’t know the whole story of this mess, even four years after it erupted…” There is, as she also writes, “plenty of blame to go around.”

Congress initiated inquiries, perhaps with the intent to understand the causes, but the effect has been more political than informative – the humiliation of high-profile bankers on national TV plays well to the home crowd and helps secure the next re-election. The press has been equally active and vigilant, and has uncovered some gems, as Ms. Morgenson did on Sunday. She writes of five Wisconsin school boards (who were shy $400 million in promised but unfunded entitlements) that lost $200 million in an investment in 2006. To me, the most amazing part of the story was that the money invested had been borrowed. Ms. Morgenson does not elaborate on that aspect of the story, but why would a school system whose budget is based on tax revenues borrow $200 million for an investment in any deal? One can understand borrowing money for operating expenses or capital expenditures, but to borrow to make a speculative investment?

It is the answer to that question that, in my opinion, leads to the root of the cause of the credit collapse – a problem that persists to this day – a loss of a moral sense. I don’t mean a moral sense in a religious context. I mean society’s moral compass appears to no longer provide any sensible frame of reference. It speaks to the moral hazard that concerned so many when banks (and bankers) were bailed out in 2008 – banks and bankers who were rewarded for being right, yet not punished when wrong.

As our country grew in wealth, it recognized an obligation to the elderly, the sick and the destitute. That concern arose to the forefront in the depths of the Great Depression; thus was born Social Security, insurance for depositors and protection for investors via the S.E.C. Over the next few decades government expanded its mandate until today it intrudes overly aggressively into our daily lives. The consequences have been a decrease in personal responsibility, an increase in dependency and a rise in moral turpitude.

While there is no question that dishonest and greedy bankers and mortgage brokers took advantage of consumers and others (like Wisconsin school boards) to assume obligations common sense would normally deny, the conditions that permitted such activity had been years in the making. The fault lies with families, schools and, perhaps most importantly, with government, which set the tone. The consequence has been the inability to differentiate between right and wrong – the lack of a moral certainty that transcends religion and politics.

Entitlements, as mentioned above, are a natural outgrowth of a wealthy nation, but, in extremis, they serve to make people too reliant on the perceived hand of benevolent government. And, as we are now learning, when those entitlements are based on false accounting, their modification or removal can be harsh and unsettling.

Government has been adamant in pushing the concept of fairness, which can result in people believing something is their due without earning it. When government deems it has a responsibility to protect people from themselves, they cross an invisible barrier. The effect on people is not unlike that felt by Jabez Stone, in The Devil and Daniel Webster, who, because of years of bad luck, sold his soul to the devil. Unlike Jabez, we don’t have a Daniel Webster to defend us against Mr. Scratch. In Walden, Henry David Thoreau wrote, “If I knew for certainty that a man was coming to my house with the conscious design of doing good, I would run for my life.” The greatest gift our Constitution provides is the gift of individual freedom. That includes the freedom to succeed or fail. We are an amalgam of people with different abilities, aspirations and work ethics. Outcomes will never be equal.

In the years following World War II, Western Europe and Japan adopted a form of social democracy. It has much to recommend it; it places a great emphasis on personal comfort and well-being. But it serves to protect people against themselves and it hinders initiative and reduces competitiveness. As we look to the future, it is not Europe that will be our competitor. It will be China, India, Brazil and Indonesia – countries that are today in the formative stages of capitalism, whose youths are becoming educated, who are ambitious and willing to work long hours, attributes that their society prizes and rewards. And characteristics we once did as well.

We can spend years delving into and debating the causes of the credit collapse that devastated our financial markets three years ago, but until we address the cultural and moral aspects of our lives that gave birth to those conditions, we will remain within their clutches. Government must foster an atmosphere conducive for resilient, innovative risk takers willing to commit time, labor and money. Let failure be punished and success rewarded. It has not only been Mr. Buffett who has been coddled, it has been most of us who have become overly reliant on a friendly government. With the recent emergence of so many fledgling capitalist countries – with their people eager to learn, willing to work hard and anxious for success – are we willing to compete?

The lead editorial in today’s New York Times, which calls for further measures to curb home foreclosures, is exactly wrong – both in terms of fixing the problem and addressing its cause. To keep homes off the market only defers the inevitable, but more importantly, in terms of addressing the cause, it rewards borrowers who overextended and sends the wrong message to future miscreants. Further, it punishes those who saved, and/or who lived within their means. In the same manner, the printing of money and the extending of quantitative easing rewards the profligate and punishes the thrifty.

As to what were the true causes of the credit collapse during which unscrupulous bankers, operating under legislation approved by Congress encouraged borrowers to take on debt they could not afford? Pogo had the answer when he said: “We have met the enemy and he is us.” The lesson of increasing dependency and decreasing personal responsibility appears to have been lost on this President. Until that message changes the moral lassitude that helped create the problem will remain in place.

Friday, August 19, 2011

"Stay the Course?"

Sydney M. Williams
Thought of the Day
“Stay the Course?”
August 19, 2011

When markets collapse, as they did yesterday (and as futures indicate they might this morning,) there is a temptation to go to ground. In fact, according to the Investment Company Institute, investors pulled $23.5 billion from equity funds last week, the most since the fall of 2008. That decline brought redemptions to $74 billion so far this year. (To put that number in perspective, the mutual fund industry comprises about $13 trillion, including about $1 trillion in ETFs. Bond funds make up about 20 percent, or $2.5 trillion. Money market funds hold another $2.6 trillion, leaving equity funds with about $7 trillion. According to the Investment Company Institute, mutual funds and ETFs controlled 27 percent of all equities at the end of 2010.) Despite a big up-day on Monday and a relatively flat Tuesday and Wednesday, I doubt that confidence was fully restored to permit a reversal of that trend. In fact, yesterday’s market assures the continuation of withdrawals.

This is not a new phenomenon. Ten years ago the S&P 500 closed at 1491.72, providing a decline of 23.4% over ten years before adjusting for dividends. Between March 2009 and the market’s peak in April of this year, the market had its fastest gain since 1936. Yet investors pulled a net of $72 billion from equity mutual funds. (That is net after Index Funds garnered $67 billion.) The Wall Street Journal had a recent article in which they questioned the survivability of the Magellan Fund, an icon of the 1980s and ‘90s. Between 2000 through 2010, the fund had net withdrawals of $63 billion. It now stands at $23 billon, a shadow of its former self. The last decade has seen two 50%+ bear markets and one flash crash – May 6, 2010 – in which $862 billion was wiped out in twenty minutes. Can it surprise anyone that investors between the ages of 18 and 30 have the largest cash positions (30%) of any age group?

The market collapse we are currently undergoing has its roots in Europe and in our dysfunctional government. The European banking crisis, brought about by sovereign debt issues, is being compared to the Lehman crisis of three years ago. As to whether that is a worthy comparison, I cannot say. My own opinion is that I find it unlikely that the Euro currency will remain viable, certainly not without a centralized European government. From my perspective, single currencies would have allowed Greece to devalue and would have hampered German exports. That suggests that Germany may be the biggest loser if the Euro ceases to exist. (The DAX is down 24 percent month to date, the largest monthly decline since September 2002.)

While the press and Washington politicians are trying to assign blame for the debt downgrade, the real cause was a spending program without a plan to repay the money. Nevertheless deficit reduction – spending cuts and revenue increases – are very much on the agenda today. The debate will still be rancorous, but it will be held.

The long term history of markets is one of rising prices, but for long periods – it took 25 years to top the 1929 peak in the DJIA and it took 16 years to move meaningfully above where the market was in 1966 – markets can be a bummer. It has now been 11 years since the S&P 500 first reached 1500. The question is how long can this go on? And the answer is, no one knows. But it is also instructional to keep in mind that the absolute market bottoms in both the 1929-1930s bear market and in the 1968-1970s bear market were made long before markets finally began rising to new levels. In the cases of both previous secular bear markets, there were embedded within those markets a number of cyclical bull and bear markets. That is likely to again be the case. As to whether the March 2009 lows hold, no one knows, but my uneducated guess is that they will.

One positive sign yesterday was that Birinyi Associates issued a bulletin in which they wrote that thus far in August 126 corporate buybacks had been announced, the most since October 2008. Corporate repurchases are worth watching. They are not perfect indicators by any means, but they played a big role in emerging from the October 1987 crash, and the record month for buyback announcements was September 2001, a week or so before that bottom was made.

The real determinant as to whether today’s market represents a buying opportunity largely depends on the economy. If the economy holds corporate profits should as well. If we head back into recession, forecasts will prove too optimistic. Again, I am not qualified to answer, but my sense is that sluggish growth will continue. To demonstrate that my ambivalence is not uncommon, yesterday Wells Capital said that the odds were high for an economic rebound while TCW put the odds at 70 percent U.S. GDP would go into reverse. I am sure both strategists have reams of supporting data. Regardless, one will be right and the other wrong.

My only point in this somewhat rambling piece is to keep things in perspective – not only consider what is happening, but also remember where we are in the broader scheme of things. Generally, at market peaks there is a universal sense of elation and at market bottoms a sense of despair. The question you must address is, is one sense dominant today?

Apart from Macbeth’s three witches, none of us can foretell the future. But that does not mean we can avoid it. In fact, there is only one way to avoid the future, a fate I don’t wish on anybody.

Thursday, August 18, 2011

"Is This What We Deserve? Can't We Do Better?"

Sydney M. Williams

Thought of the Day
“Is This What We Deserve? Can’t We Do Better?”
August 18, 2011

How do these guys sleep at night? There are those who argue that we get what we deserve in our politicians. If that is true, I have lost all self respect and you should too. A few vignettes serve to make the point.

Disagreeing with Federal Reserve Chairman Ben Bernanke’s decision to continue the process of quantitative easing is one thing, but to infer that such action may be treasonous, as did Governor Rick Perry, is quite different. It may have been no more than a malapropism, but even so it demonstrates a lack of respect for the office, and indicates an amateur in the business of Presidential politics. He should read the beginner’s instruction manual for Presidential candidates. First, open mouth; second, remove foot; third, speak. Michelle Bachman’s list of misquotes runs from the dumb to the ludicrous. She mistook Concord, New Hampshire for Concord, Massachusetts and claimed the President “released all the oil from the strategic oil reserve” when the actual number was four percent. She also informed her followers that the Lord says to wives: “Be submissive” [Ms. Bachman, though, must have been granted dispensation from this requirement] and she claims gay marriage is an “earthquake issue.” If gay marriage is an earthquake issue, one wonders what she would have said had she been President on 9/11 or during the credit crisis of September-October 2008!

Mitt Romney has apparently decided that silence is golden. Like the Lockheed Nighthawk, Mr. Romney slips surreptitiously from caucus state to primary state with barely a murmur from the press. He might be recorded except that his audience is normally asleep by the time he gets to his second sentence. Were it not for Romneycare, nobody would know he was around. Then there is Congressman Ron Paul who makes the mistake of saying what he believes regardless as to who is listening. Voters, conditioned to the lying cynicism of politicians, have a hard time inserting this Libertarian into a hole designed for Republicans.

The President is certainly guilty of misstatements, even when his teleprompter is working. He assumes that the mainstream press will give him a pass, which it almost always does, including such “apolitical” outlets like Bloomberg. In that sense, his facile fabrications are more nefarious. They don’t make him seem mean or stupid, like Mr. Perry’s or Ms. Bachman’s; they are more calculating. The internet is filled with recordings of Mr. Perry’s treating of Mr. Bernanke like Benedict Arnold and of Michelle Bachman making inane comments like telling her followers that the U.S. 2010 census was a “plot.” But little is to be seen of the President claiming “we’ve had a run of bad luck” when referring to the Japanese Tsunami, the “Arab Spring”, or Europe’s debt crisis. It’s as though endogenous factors played no role in our slow economic growth and high unemployment. Mr. Obama seems never to be called out on the fact that he ignored Simpson-Bowles, had his budget in February rejected by the Senate 97-0, or that he has yet to present to the people a concrete plan for dealing with the deficit and tax reform. In contrast to Theodore Roosevelt, Mr. Obama speaks loudly and carries a wiffle bat. John Locke once said: “I have always thought the actions of men the best interpreters of their thoughts.” In the case of Mr. Obama, there seems little relation between words and deeds.

In Iowa and Illinois, while riding around in his $2 million Canadian-made bus, the President, unless he has had a divine revelation which has gone unrevealed, has been telling a couple of whoppers. After insinuating that he is the only reasonable person in the room (an assertion easily made, but not supported by the facts – there are no “reasonable” people in Washington,) Mr. Obama borrowed a line from President Reagan, suggesting that government should be there to make life easier for business, not impede it or make it more expensive. It was a statement with which most people would agree, yet the reality of Mr. Obama’s actions does not accord with the fiction of his words. The President neglected to mention the Wall Street Reform and Consumer Protection Act, nor did he mention the Affordable Health Care Act, nor did he express any remorse over the Cap and Trade Bill he attempted, but failed, to push through Congress. And he certainly did not mention the fact that regulatory agencies have seen their budgets expand by 16% since 2008, or that employment within those agencies has risen 13% during the same time, or that 75 new major rules have been imposed in his first 26 months, costing the private sector $40 billion. Distance from the office, he must have determined, would provide cover for the disagreeable truths of his past actions. Of course, he may have felt that duping people is easily done and would warrant no rebuke.

As the secrecy surrounding the mission that killed Osama bin Laden demonstrated, Washington can keep mum when it chooses, but the advent of the internet has had the effect of placing public officials – and in fact all of us – in a fishbowl. Twitter and Facebook appear necessary components for most adults and certainly for anyone under thirty. Anything that we say or do is liable of being recorded. Certainly anything foolish that those on the campaign trail say or do will be on YouTube within moments. Matt Taibbi, in a scintillating but censorious article on Michelle Bachman in Rolling Stone, points out that she is a television camera’s dream – likely to say or do something insane at any moment, the ultimate reality-show protagonist. That raises an interesting question: was it happenstance or coincidence that reality TV arrived the same time as YouTube?

Presidents from George Washington on have had experiences they preferred to keep secret – Washington’s teeth, Jefferson’s dalliances, Lincoln’s depression, Kennedy’s girlfriends. For most of the first 200 years the press played Sancho Panza to the White House’s Don Quixote. However, with Bob Woodward outing Nixon’s lies in 1973 that “era of good feeling” came to an end. Candidates for office enter the imbroglio of a Presidential campaign knowing what may come – that their words and their actions will be available for all to watch. The fact that that does not deter them from dopey statements or outright lies says much about these men and women on whom we lavish millions. But it speaks volumes about us who get what we deserve.

However, with my Panglossian, and perhaps naive, optimism it always seems possible that we will get surprised and that a Jon Huntsman will come from behind, or that a Paul Ryan will pick up the baton.

Wednesday, August 17, 2011

"Needed - Incentives to Invest"

Sydney M. Williams

Thought of the Day
“Needed – Incentives to Invest”
August 17, 2011

The most important story of our generation is that the coming flood of retirees happens to coincide with the growing realization that entitlements promised have been based upon phony accounting. That fact requires a far greater need for savings and investments than currently exist. To put that in perspective, if every one of the 75 million American baby boomers had $500,000 to invest that would amount to $37.5 trillion, a little more than half the size of today’s total U.S. capital markets. Warren Buffett’s 400 highest earners, with aggregate income of $90.9 billion in 2008, are obviously well provided for, but tomorrow’s average retiree is woefully underfunded today.

The modern welfare state began in Western Europe in the aftermath of World War II. Population growth had been slow during the 1930s and through the war years. Millions of young men throughout Europe between the ages of 18 and 30 died as a consequence of the war. The Continent had experienced two devastating wars in less than a generation. As rebuilding began, during the late 1940s, birth rates surged. By the time the late 1970s arrived the war generation was beginning to retire, and the millions born in the post war years were approaching their peak earnings’ years. The next twenty years would prove to be a golden age for the welfare state – a large working population and a small retirement group. That age is at an end. Western Europe is now faced with an inflated and growing retirement force and a smaller and shrinking number of workers to support them, and much of Europe is experiencing declining populations to boot.

In the U.S., conditions were similar, though less extreme. (And, of course, the U.S. continues to have population increases.) Four countries – Germany, France, the UK and Italy – lost just over 4% of their population to the war, or about nine million people, with Germany the biggest loser with almost ten percent of the population killed. Losses in the United States were, on a relative basis, less. The U.S. experienced 413,000 deaths, or about 0.32% of the 1940 population. Nevertheless, there were similarities – rising expectations and costs, combined with an increasingly small number of workers for every retiree, as the ‘60s and ‘70s morphed into the ‘80s and ‘90s.

Entitlement reform is obviously based on concerns about these trends. What had been a third rail of American politics has become a much discussed (though yet little action) issue, in large part because of Congressman Paul Ryan’s “Roadmap for America” first introduced in 2008. At the time, even Republicans distanced themselves from Representative Ryan. Yet yesterday, even President Obama, on his tax-payer funded bus tour through the Midwest, acknowledged the need for entitlement reform.

But what has been missing has been its corollary – the need to implement tax reforms in such a way that average Americans are encouraged to save and invest. Entitlement reform means that individuals will bear the consequences of their actions. Entitlement reform necessitates tax reform. Warren Buffett, in his op-ed in Monday’s New York Times wasted valuable space in simply calling for higher taxes – perhaps a necessary symbolic gesture – but saying nothing of tax reform. Perhaps Mr. Buffett’s taxes are too low, but to infer, as he did, that taxes are too low on capital gains and dividends for average Americans – both already taxed at least once – is to discourage, not encourage, investments and savings.

The “nanny” state effectively and definitionally removes any sense of accountability and responsibility from the individual to the state. A country that no longer has the means to honor the promises it has made explicitly restores that responsibility back to the individual. But, in so doing, the state must encourage the individual to save and invest. Even so, the process will be difficult and will not seem fair, as those in the private sector discovered when the bell tolled for defined benefit plans thirty years ago. The fact that the Defense Department has floated a trial balloon, suggesting the replacement of a pension system based on the average of the last three years pay for those who have served for twenty years with a 401k-type plan, is an indication of the need for reform. Change is never easy, but people adapt. Congress has an obligation, in terms of tax reform, to facilitate this transformation.

The economy and markets have a way of adapting to changing situations. Michael Barone, a senior political analyst at the Washington Examiner, wrote an op-ed in yesterday’s Wall Street Journal in which he contrasted what he calls the “Michigan model” to the “Texas model.” The Michigan model was driven by the farm-to-factory migration that lasted from about 1890 to 1970. It found its footing in the concept of big companies and big unions. It was assumed by many 1950s and ‘60s liberals to be the wave of the future. But, as Mr. Barone wrote: “History hasn’t worked out that way. In 1970, Michigan had nine million people. In 2010, it had ten million. In 1970, Texas had eleven million people. In 2010, it had twenty-five million. The Texas model was driven by lower taxes, encouraging entrepreneurship and, once the South was delivered from state-imposed racial segregation, attracting foreign manufacturers and non-union labor. “The Texas model,” Mr. Barone concludes, “may be sweeping the Midwest, not vice versa.”

Markets also adapt. Ironically, at a time when the U.S. is carrying its heaviest load of debt (as a percent of GDP) since World War II, investors are clamoring to buy Treasuries with yields on the Ten-Year less than trailing twelve-month inflation and at or below the dividend yield on the S&P 500. Investors, to thrive, must adapt to opportunities that present themselves. While total returns to safe assets have matched or slightly exceeded those of risky assets since the market lows nine years ago, the more important question is the outlook for the next ten years. No one can predict the future. Nevertheless, safe assets (Treasuries) are priced far richer than they were nine years ago, suggesting investors are more risk averse today than they were in the years leading up to the credit crisis. The surprise, therefore, should favor riskier assets (equities and Corporates) over the next decade.

But government must recognize the necessity of people to save and invest more; Congress must keep that need in mind as they debate tax reform.

Tuesday, August 16, 2011

"The Week That Was"

Sydney M. Williams

Thought of the Day
“The Week That Was”
August 16, 2011

While much has been written of the similarities between last week’s roiling stock market to those frightening weeks when the world’s financial markets seemed on the verge of collapse in 2008, what separates them is far more important. Over the course of five days, the DJIA traveled 2133.69 points (18.6% from the previous Friday’s close,) yet ended the week down a mere 175.49 points (down 1.5%.) It was like a trip through a maze, about twelve times longer than it had to have been.

During the tumultuous days of almost three years ago, weekly volatility was almost as marked as the daily. Over a period of nine weeks – September 29 through November 28 – the market never rose or fell less than four percent on a weekly basis. In one horrendous week, the one ending October 10th, the Dow Jones closed down 18.2%. What the two times did have in common is that they were man made, with Washington playing a major role in both.

Three years ago, the nation, and in fact the world, faced an unprecedented collapse of confidence in the global financial system. The TED spread (the difference between the U.S. Three-month Treasury and LIBOR had widened to 485 basis points, from its pre-crisis level of 50 basis points. High Yield Bonds were priced to yield 25%. By the end of December 2008, a month after the peak of the crisis, the spread between High Yield and Investment Grade Bonds was still at 1108 basis points. The spread between Investment Grade Corporates and the Ten-year Treasury was 419 basis points. The concern was not just bank liquidity, but bank solvency. The VIX during that fall traded over 85.
Today those spreads are, respectively, 24 basis points, 368 basis points and 231 basis points. The yield on the FINRA-Bloomberg High Yield Bond Index has backed up to 8.3%. We are nowhere near close to the fear that gripped markets back then. Bank liquidity is no longer a serious question. On August 8, the VIX traded at 48. What we are now facing is a collapse in confidence in a political system and the ability of the economy to overcome hurdles thrown in its path.

In the aftermath of the credit crisis, Congressional fingers had no shortage of targets at which to point – particularly at bankers and mortgage brokers, who certainly played a role and deserved censure and more. Unfortunately though Congress, which played a critical role in creating this environment of little or no accountability, served as prosecutor and had little interest in seeing itself in the docket. Additionally, they deemed it impolitic to blame something so amorphous as “society,” which would include the electorate. Yet Washington was a leading factor in terms of creating the conditions that caused the crisis – homes for everyone, funded by government sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. The relationship between Congress and the GSEs was not only cozy, it was symbiotic. Worse, in their determination to make life as “fair” as possible, Washington created a denouement of irresponsibility. And the people followed their lead, taking on debt they could not afford.

Once the crisis began to fade, people noted that bankers were rewarded, not punished; many consumers who had overextended themselves were saved, in part by those who had lived within their means. As well, the prudent were “rewarded” with unusually low interest on their savings – the lowest in memory. Observers, watching this tale unfold, may well ask: what is the moral of this lesson?

Today the country is torn between two unattractive political alternatives: On one side, we have liberal Democrats who choose not only to maintain entitlements, but to extend them, as we saw with the unilateral passage of the Affordable Health Care Act and with the attempt to pass Cap and Trade. On the other side we have Christian Fundamentalist Republicans who leave no doubt that God is riding shotgun on their side, as they repeat their mantra – no increase in taxes.

The current tax system is an atrocity. It is far too complex. It is too narrow in its base. It favors the very wealthy and large business. It needs reform – it should be broadened and flattened with lower marginal rates. Deductions should be limited, which would cause the “coddled” Warren Buffett to pay higher taxes, assuming he doesn’t voluntarily make a contribution to reduce the deficit. (In 2010, the IRS received $2,840,466.75 in such voluntary contributions.) The tax system should encourage investment and discourage marginal consumption. The sanctimonious Mr. Buffett has enough money, but most of the estimated 80 million people expected to retire in the next several years do not. In my opinion, that factor will be the most serious problem the nation will face over the next couple of decades. Additionally, entitlements, left unreformed, will bankrupt the country.

Like those who were urged to look upon the works of Ozymandias, the stock market views the schizophrenic responses of politicians to this situation with despair. Assuming S&P 500 operating earnings estimates for 2011 of $100 are accurate, the market is selling at twelve times, indicating an earnings yield of 8%. That yield is slightly lower than that of High Yield Bonds, but substantially higher than Treasuries or Investment Grade Bonds – suggesting to those who measure such statistics that stocks are attractive. However, given that current interest rates have less to do with the free flow of capital and more to do with an activist Fed, one would have to discount that analysis, at least somewhat. To me the market seems fairly valued, getting pushed or pulled not so much because of fundamentals, but because of changes in perceptions as to what is happening in Washington. That is not to say there are no attractive stocks. There are. Many large multi-nationals sell at reasonable multiples with attractive and growing dividends.

Markets have been in purgatory since that collapse of the tech-internet bubble almost a dozen years ago. Each crisis assumes its own characteristics. But what we are now going through pales in comparison to 2008. Nevertheless, markets are likely to remain in a trading range, until a sense of confidence in the U.S. and our capital markets are restored. Given the current Administration’s actions (as opposed to speeches) and the crop of Republicans vying for the job, it seems likely to me that over the next few years we will continue to experience periodic repeats of the “week that was.”

Sunday, August 14, 2011

"The Economy - There is no Such Thing as Normal"

Sydney M. Williams
Thought of the Day
“The Economy – There is no Such Thing as Normal”
August 12, 2011

When markets are in turmoil, as they have been the last few days, rational explanations make no sense. Everybody has an opinion as to why or where we are headed, but no one really knows. Talking heads on CNBC and Bloomberg make as much sense as listening to what they are saying with the sound speeded up. It is better to detach oneself, step back and try to make sense of the larger picture.

The financial crisis of 2008, and which continues today, was a function of too much debt – in financial firms, with consumers and in government. In the case of financial firms, debt rose as a function of financial innovation that gave confidence to traders that they could hedge any extra leverage. In the case of consumers, the motivation was a desire to live better, and was based on the belief that their homes would continue to rise. Government’s increase in debt was based on a concept of fairness, the lack of prudence in not paying for a war and a belief that homes and healthcare were undeniably basic rights. In all three cases, the Fed’s decision to keep interest rates unusually low had the effect of pouring gasoline on flames.

Missing from the list are corporations. During the LBO (leveraged buy-outs) and MBO (management buy-outs) booms of the 1980s and 1990s, many corporations took on enormous amounts of debt. Some companies never survived, but those that did learned to operate more efficiently. Many of their decisions at the time may have seemed inhumane, in that they involved thousands of lay-offs, but the businesses that survived permitted future growth in employment. Even earlier, beginning in the 1970s, many companies began to realize that there was a hidden time bomb baked into their pension (defined contribution) and health plans. Those that saw the handwriting on the wall – the looming future obligations of generous plans and an increasing retirement population – began moving toward defined contribution programs.

Jeremy Grantham, in his quarterly letter writes that the era of defined pension plans were “remarkably generous” and “represented a high point in corporate responsibility to employees.” That may be true, but those plans were terminated at the urging of investors like Mr. Grantham, as they impeded profitability. These generous entitlements were a principal cause of General Motor’s filing for bankruptcy two years ago. It is a reason why the Pension Benefit Guaranty Corporation has found itself so frequently dramatically underfunded.

The crisis was intensified by another factor, and that is changing dynamics in the work force, particularly the financial industry. Beginning at some time in the 1960s, the U.S. moved from a manufacturing society to a service society, which moved the workforce from higher-wage union workers to lower-pay service workers – the exception (in terms of income) being the growth of the financial sector. Two years ago the Peterson Institute for International Economics published a paper in which they concluded: “The bottom line is that the U.S. financial-services industry is a sector in structural decline [in terms of the numbers of people employed,] as is Wall Street.” It is not that the basic businesses of lending and servicing are in decline, it is because technology is replacing people. Financial companies have been the growth drivers over the past three decades, becoming increasingly profitable as innovative products gave them the confidence to increase their leverage. The credit collapse showed the vulnerability of banks to the leverage they had incurred. Dodd-Frank, in particularly the Volcker Rule, put the brakes on that trend. These changes imply lower returns on equity, but with diminished risk. Technology has meant that these services can be offered with fewer employees, suggesting that recent lay-offs at HSBC and Lloyds will only be the first of many more.

Another problem has been education that has failed to keep pace with changes in the work place, leaving millions of people unemployed or under employed, while thousands of jobs go unfilled for lack of qualified workers.

These are uncomfortable truths that the market and people seem to intuitively understand, but ones that Congress and the Administration do not.

Over the past decade, GDP was driven by massive increases in debt. The “new normal” recognizes that deleveraging, by definition, means slower growth going forward. There is no getting away from that truth. “The Democratic argument,” Daniel Henninger wrote in yesterday’s Wall Street Journal, “has been that the country could maintain its remarkable economic success while performing all these social goals, though with cutbacks in defense spending.” But they cannot,, unless they increase borrowings or raise taxes. While the debt ceiling has been raised, the recent debt downgrade serves as a waning shot about future increases. And simply increasing tax rates, without reform, will impede economic growth.

The silver lining in this perception is that states are beginning to recognize the limits of altruism. Tuesday’s election in Wisconsin, a notably liberal state, was a victory for reform and the battle to control public spending. (One should read Wednesday’s editorials in the New York Times and the Wall Street Journal to get two completely different takes on the same election!) Besides Scott Walker of Wisconsin, New Jersey’s Governor Chris Christy, Mitch Daniels in Indiana, John Kasich of Ohio, Rick Perry of Texas and Andrew Cuomo of New York among others have been tackling the thorny issue of entitlements. Most real reform begins in a grass-roots manner at the local level. If that is true, Washington cannot be far behind. The House of Representative, with 335 members, elected 95 freshmen in 2010. One should expect further, and perhaps more dramatic changes in 2012. That should bode well for a growing recognition that change is coming. Nevertheless, economic growth is likely to be anemic and Wall Street has little confidence that current policies are helping a growth agenda. Serious attempts at tax and entitlement reform would be a sign that Washington finally “gets it.”

The Peterson Institute concludes their report of two years ago by pointing out: “Creative destruction has always been seen by economists as a natural and, on balance, healthy part of the U.S. economy [more so than in European countries] because there has always been something new to fill the void left by failing industries.” That should be true of the future but, in order for that to happen, the private sector cannot be restrained. Creative destruction lends proof to the concept that there never is a “normal” in the economy.

As for the market, I have no idea when volatility will diminish, but it is interesting to note, as Laszlo Birinyi pointed out yesterday, that for only the second time in fifty years the yield on the S&P 500 exceeds that of the 10-Year U.S. Treasury Bond. Stocks may not be as cheap as they were in October 2002 or March 2009, but they are not expensive. Twenty-nine years ago this day, the DJIA made its generational low and the great bull market began. That won’t happen today, but it may be an omen.

Thursday, August 11, 2011

"Regulation - Too Much or Too Little, or Just Dumb Regulation?"

Sydney M. Williams

Thought of the Day
“Regulation – Too Much or Too Little, or Just Dumb Regulations?”
August 11, 2011

Congress is always more interested in writing new legislation than in ensuring the enforcement of existing rules. The reason is as old as the oldest profession. Once laws have been written, lawyers are hired by affected businesses searching for loopholes, while lobbyists spend millions on those in Congress seeking exceptions. It is a symbiotic relationship, as old as the republic, which allows business to circumvent laws intended to restrict them and provides those in Congress the means to run for re-election. When a member of Congress is so unfortunate to lose his job he simply doffs the hat of a lobbyist. The game goes on.

What brings this to mind was an article in yesterday’s Wall Street Journal regarding a decision by Main Street Bank of Kingwood, Texas to exit the state banking system. The problem, according to Thomas Depping the bank’s chairman, is the tightening of the “regulatory noose.” Following the financial crisis, regulators were blamed for lax oversight. Typical of bureaucrats and frankly typical of human nature, they shut the door after the horse had left. They chose to issue new rules – more onerous than the ones they had failed to enforce. “Regulators,” the Journal quotes Paul Merski, chief economist for the trade group, Independent Community Bankers of America, “have gone one step too far and are choking off lending.”

The complaint filed by Main Street Bank is instructional. The bank concentrates in small business loans, with an average loan size of $100,000 for customers with less than a million dollars in revenues. Ninety percent of their loan portfolio is in such instruments. Charge-offs represented 1.25% of assets in this year’s second quarter versus an industry average of 1.82%. Nevertheless, the FDIC wants small business lending to be only 25% of total loans, despite this banks history and focus. That pits a perceived safety issue on the part of the FDIC against a growth decision on the part of the bank. It appears that the FDIC chose to ignore that inherent in small business loans is diversification. But an arbitrary decision, made by a bureaucrat in Washington, to cause a bank in Texas to conform to a lending model that might work in Ohio makes little sense. Regulators should be concerned with the quality of the loan portfolio, write-offs as a percent of assets and overall capital requirements.

The result will be that Main Street Bank will give up its charter and set up an operation as an independent lender. The consequences will be fewer funds available at a higher cost for the small business borrowers who had been banking at Main Street, and greater risk for the investors in the new enterprise. The FDIC’s decision seems a particularly bad case of timing. The economy has weakened materially and we may be on the cusp of another recession. Two days ago the National Small Business Association reported that 88% of small business owners anticipate a flat or recessionary economy in the coming year. They also reported that 45% of small businesses (versus 40% in December0 do not expect growth opportunities in the coming year “due to the inability to access adequate financing.”

Typically, regulators come roaring into town only when the ambulance has already departed with the patient. This tale of bad timing applies to the stock market as well. In the past, volatility such as we have been experiencing would represent investors scouring toward safety, like lemmings, piling into “risk free” assets, or changing their minds and dashing toward riskier assets. Unfortunately today it represents something far more ominous – the role of high frequency traders. These algorithmic programs are designed to capture minute mispricing in securities. With their speed and their physical location adjacent to exchanges they have been accused of front running orders. Regardless, they are chasing traditional, fundamental investors away from the field and turning what was a mechanism for raising capital for business, and a means of providing liquidity for investors, into a casino.

From what investing clients tell me, these traders provide no social or economic value other than to line their own pockets. They do have prominent defenders. Two years ago, as stocks were climbing out of the whole created during the credit crisis, Arthur Levitt, former Chairman of the S.E.C., penned an op-ed in the Wall Street Journal in which he referred to these traders as “just the next stage in the ongoing technological innovation of financial markets.” As for those who assert that “high-frequency trading has no moral or underlying economic value,” he responded: “The Securities and Exchange Commission should ignore these complaints.”

Having friends in high places has obviously served these traders well, as they now account for 75% or more of total volume. Wild swings in individual stocks, taking place in microseconds, allow these traders to make fractions of pennies, multiplied millions of times. It translates into enormous profits, which help feed our political system.

Our firm has been in business for forty-seven years executing customer orders. We trade several million shares every day. From our perspective we can see no value these people add to our clients’ returns. They add no liquidity, but they do add to volatility, chasing real investors off the field. They accentuate trends, acting as a multiplier. They love volatility. They abhor passivity. Thus far August has experienced five days (out of eight trading days) in which the Dow Jones Averages have risen or fallen more than one and a half percent. In contrast, through the end of July there had only been nine such days. This the second week in August, with its unusual volatility, looks ominously like the period from mid September to mid November 2008. On July 5 the capacity used by the Consolidated Quote System was increased to one million quotes per second, a 33% increase, permitting an increase in quote stuffing, the practice of entering and cancelling orders to slow down the prices seen by regular investors.

Our Treasury is in need of revenues, as we all know. One place to start would be to increase the capital gains tax on intraday trades. The most important reason for doing so would not be for the money collected, but for putting a “Denver Boot” on High-Frequency Trading.

We cannot live without regulation. That we all know, but it must have commonsensical characteristics and should not be based upon favoritism. …………………………………………………………………………………….

Forty-nine years ago this day I boarded a bus in Boston, debarking a few hours later at Fort Dix for basic training. In memory of that day, I will be taking my three oldest grandchildren – cousins aged nine, ten and eleven – on the ferry this afternoon to Highlands, NJ and the house we rent in Rumson for the month of August, a far more attractive place than the Pine Barrens of southeastern New Jersey. I will be back Tuesday morning.