Thursday, September 29, 2011

"Republican Agonistes"

Sydney M. Williams

Thought of the Day
“Republican Agonistes ”
September 29, 2011

While things can change dramatically, with thirteen months to go until the 2012 election, at this point it appears that the Presidency is the Republicans to lose. The economy is stuck in neutral, if not reverse. Unemployment has risen, as interest rates have declined and as stimulus money has been spent. Confidence, the true engine of any economy, is AWOL. Yet Republicans seem determined to snatch defeat from the jaws of victory.

While the field of candidates includes many good people with sensible ideas about the economy and how to fix it, particularly Herman Cain, it also includes those I could only describe as nuts. When the majority of the candidates stood on the stage at the last debate, each trying to out-do the other in terms how high a wall to build along Mexico’s 1800-mile border, I could only imagine how President Reagan would have cringed at such xenophobia . Where was the sunny optimism he portrayed? Granted, Representative Ron Paul pointed out the obvious – walls keep people in, as well as keeping people out. And Rick Perry looked defensive defending his decision (correct from my perspective) that no fence be built and that the children of illegal immigrants should not be singled out when it came to the state university system. Herman Cain spoke of the role of immigration, but could have done so more forcefully. Most appalling was Mitt Romney who would have the audience know that he would build the highest and stoutest fence. Do those who want a fence really believe that the sins of ones parents should be visited on their children? Does the Bible-thumping Christian-right not believe in Jesus’ call for forgiveness? No one of the stage pointed out that our country is one of immigrants. It is that, as much as anything, which differentiates us from others in all parts of the world. When President Reagan gave his farewell address, he spoke of his vision of a “city on a hill.” He said, “…and if there had to be city walls, the walls would have doors and the doors were open to anyone with the will and the heart to get here.”

Humor is critical to a politician, especially a President. The ability to laugh at one’s self is a sure sign of self confidence. Lincoln’s humor was famous. President Reagan often deflected criticism with humor – “there you go again,” being one of his favorite ripostes. He made an art of joking about his age. Unfortunately, Mr. Reagan’s comic touch has escaped most of his political heirs, so that when humor is attempted, they look either ridiculous or mean.

There are certainly attractive Republicans who “get it” in terms of the needs of the economy. Herman Cain does. Others who come to mind include: Governor Chris Christie of New Jersey, who is endowed with a good sense of humor, and Governor Mitch Daniels of Indiana, who has turned around his state and who, with self-effacing humor, often jokes about his stature. Governors Scott Walker of Wisconsin, John Kasich of Ohio, Rick Snyder of Michigan and Rick Scott of Florida are all attractive and well-spoken. Senator Mark Rubio, also of Florida is young, articulate and attractive. Representative Paul Ryan of Wisconsin has been the most forthright in producing policies that provide a realistic alternative to the socialist contract Mr. Obama has foisted on the country. These people represent a new-generation of Republican politicians. And there are others. I don’t worry about the future of the Republican Party, but I despair of the selection process that seems to favor those candidates from the extreme right or left – class divisiveness for those on the left and red meat for those from the red states.

One cannot help wondering whether our electoral system is fatally flawed – that the only choices we will have are those from the fringes? Are we faced with choosing between an extreme leftist (into which camp I would place our current President) and a right-wing nut like Michelle Bachman? Five states now dominate the early selection of delegates – New Hampshire, Iowa, South Carolina, Colorado and Nevada. Together they represent 5.4% of the U.S. population. (I was raised in New Hampshire so have emotional ties to the state, but I ask, should a state of 1.3 million people have so great an influence on a country of 308 million?) Florida, with a population larger than those five states, now wants to move their primary up a month to January 31, earlier than the Iowa caucus or the New Hampshire primary. Those two states are now threatening to bring their selection processes forward to just after the Holidays, removing what seasonal joy still remains. Perhaps it is time to consider the direct election of Presidents?

The advent of the Internet and of YouTube in particular, has meant that what we say and what we do no longer remains within the place we spoke or we acted. “What happens in Vegas does not stay in Vegas.” It elevates the importance of principle of saying what we mean and meaning what we say. In his speech two days ago at the Reagan Library, Governor Chris Christie emphasized the importance of principle. “America’s role and significance in the world is defined,” he said, “first and foremost, by who we are at home. It is defined by how we conduct ourselves with each other. It is defined by how deal with our own problems.” Are you listening, Mr. President?

Among the Republican candidates there are those, like Herman Cain, Ron Paul and Jon Huntsman who, to me, seem principled, but the closer they get to the brass ring the greater is the tendency to begin braying like the jackasses they are supposed to defeat. The country faces serious problems. It needs a principled leader who will demonstrate leadership with the ability to compromise, but who holds firm to the principles that have made this nation strong – a government sympathetic to those who cannot care for themselves, the freeing of excessive regulation to those who create jobs, an understanding of markets and competition in education, as well as in trade, a system of defense that affords protection to Americans at home and abroad, and the instilling of confidence in all Americans.

The mission should be to defeat President Obama and they left-wing socialist ways he is taking the country. Arguing about a wall to keep out Mexicans, or debating who is the most God-fearing or trying to determine who is the most socially conservative is a sure road to ensuring another four years of President Obama. In my opinion, that would be bad for our economy, for the living standards of the people, and for our position in the world. We deserve better. Republicans had better understand the seriousness of financial plight we are in, otherwise they will have no one to blame but themselves.

Wednesday, September 28, 2011

"The World Remains a Dangerous Place"

Sydney M. Williams

Thought of the Day
“The World Remains a Dangerous Place”
September 28, 2011

Dissociative identity disorder is a psychiatric diagnosis that describes a condition in which a person displays multiple distinct identities. That sounds like a definition of the stock market over the past few weeks – or perhaps it defines portfolio managers. Every time the S&P 500 moves up or down about 70 points (about 6.5%), as it has eight times in the past eight weeks, the value of that index gains or loses approximately a trillion dollars. Either unwilling to confront the future, which seems true of Europeans, or unsure as to what it holds, which is always true of investors, the market is far more schizophrenic than actual events. Recognizing this blossoming potential for disruption, the SEC has begun an overhaul of rules adopted following the 1987 stock market crash. Under their proposal, curbs would be initiated when the S&P 500 fell 7 percent. Previously the index used to trigger a closure was the DJIA and the curb was a 10 percent decline.

The market’s three-day rally (+4.1%, with futures higher this morning) has been based on positive rumblings emanating from Europe – Greece’s apparent willingness to live a more Spartan life, and the possibility that the €440 billion available to the European Financial Stability Facility (EFSF) might be levered to €4 trillion – a rumor more than a probability. Any increase needs approval from the seventeen countries. Importantly, the German Bundestag votes Thursday and it is not a given that they will approve. Their citizens do not seem to be in a particularly charitable frame of mind, at least when it comes to profligate Greeks. The Greek parliament did approve a property tax; it remains to be seen as to what success they will have collecting. As far as the U.S. intervention into Europe’s financial problems, Ambrose Evans-Pritchard, in yesterday’s The Telegraph, wrote: “Berlin savaged (US) plans to boost the EU Rescue Fund as a ‘stupid’ idea.” Take that as a “no interest.”  “Extend and Pretend,” is the way a Danish economist on Bloomberg characterized the situation in Europe.

Later this week representatives from the EU, the IMF and the ECB will fly to Athens to assess the situation. This week’s meeting in Basel of the Basel Committee on Banking Supervision will be of interest given the deteriorating conditions in Europe. There has been some talk of providing relief to the systemically important financial institutions (SIFI,) or simply, “banks too big to fail.” Under Basel III, a Tier I capital surcharge was imposed of 2.5% on top of the existing requirements of 7% on Tier I capital. But it is liabilities that should be of greatest concern to investors. In the U.S., the issue continues to be one of mortgages and at what value are they carried, especially as they continue to be put back. In Europe, the same concern holds for sovereign debt. In both places, there is the concern as to the value of their notional derivatives outstanding – most of which is offset – and the unknown risk of counterparty failure. According to the newsletter, Hedgeye, credit default swaps on the bonds of ten European banks are trading over 700 basis points, an indication that there is a 40% default probability. That sounds , to borrow a phrase from Wilbur Ross, like an actual risk, as opposed to a perceived risk.

But Europe is not alone in appearing riskier than normal. Despite the Arab “springs” that emerged six months ago, peace in the region seems no closer. Washington has long practiced a form of diplomacy that it is better to support the dictator you know than to take a chance on the freedom fighter you don’t. Leaders in Libya, Tunisia and Egypt have been deposed, but thus far no replacement governments have yet been formed. Palestine and Israel are no closer to accord than they have been in the past sixty-five years. Syria has shown no remorse in its treatment of dissidents and women. Iran continues to work toward nuclear weapons, with little being offered in terms of deterrents. Pakistan, a nuclear power, is becoming a basket case, having gone from an ally to a risk. Admiral Mullen, Pakistan’s best friend in the Department of Defense, gave testimony on Monday before the Senate Armed Services Committee. He spoke regarding the September 13 attack on NATO headquarters in Kabul that killed twenty-five, stated: “With ISI (Pakistan’s spy agency) support, Haqqani operatives planned and conducted that truck bomb attack, as well as the assault on our embassy.”

“The southern-hemisphere summer has given way to autumn, but the sun is still shining on Chile,” is the way The Economist recently started a piece on Latin America. Democracies appear to be under pressure in the continent. Hugo Chavez’ influence is increasing. Left of center governments now operate in Argentina, Bolivia, Brazil, Ecuador, Paraguay and Uruguay, besides Venezuela. President Juan Manuel Santos of Colombia does not have the close relations with the U.S. as did his predecessor, Álvaro Uribe. Peru’s newly elected president, Ollanta Humala, is a left-leaning politician who has vowed to distribute wealth to the poor, taxing the mining industry to do so. Chile, with Ricardo Lagos as president, is the one country in South America now firmly in our camp.

Increasingly the world is looking east, to China. When the subject of economic growth arises, no matter one’s country, we consider China. They are a major player in the global economy on all continents, despite an economy slightly more than one third. Militarily, China is becoming a power to be reckoned with. As relations with the U.S. have become increasingly tenuous, Pakistani President Zardari recently invited delegates from the Peoples Republic in a demonstration that should the United States no longer provide Islamabad with its $5 billion annual allowance, the shortfall would be made up by Beijing. However, we must always remember that China’s capitalism is of a mercantilist form – the state makes the crucial decisions and that political repression remains a way of life.

Rancorous continues to be the operative adjective when describing America’s political circus. Unemployment remains above 9 percent. GDP growth in the first half of this year was less than one percent, and it does not appear that the third quarter will show any improvement. Yet, with the election over thirteen months in the future, the President has chosen this moment – purportedly to drum up votes for the job bill he knows has no chance of passing, at least as written – to chase across the country drumming up the $1 billion in cash he claims he needs to win re-election. We have a problem of discord in Washington and he is doing his utmost to further divide the people along class lines. The top one percent of all tax payers now pay 38% of all federal income taxes, while 46.5% pay none. The President’s gaffe on Monday when he said “Jews” instead of “janitors” might have been excusable, except the man never speaks without a teleprompter. Yesterday I noted that in repeating the same line he substituted “plumbers” for “janitors” – safer, I guess, unless you happen to be Polish.

The world does remain dangerous, but it always is; though this time it seems to have a harder edge. Nevertheless, while Treasuries have been rocketing skyward, stocks are in the midst of a ten-plus-year digestion phase. And the future, as always, remains a mystery wrapped in an enigma. Yesterday, Richard Fisher, President of the Dallas Fed spoke before the Dallas Assembly. He relayed a story of a sign his brother had seen on the desolate island of Jan Mayan, 600 miles west of Norway’s North Cape:

“Theory is when you understand everything and nothing works.
Practice is when everything works, but nobody understands why.
At this station, theory and practice are united, so nothing works and nobody understands why.”

Words that resonate back here at home, as we ponder our tomorrows.

Tuesday, September 27, 2011

"Putin, the Victor - The Russian People, the Losers?"

Sydney M. Williams

Thought of the Day
“Putin, the Victor – The Russian People, the Losers?”
September 27, 2011

In the wake of the collapse of the Soviet Union, capitalism, in varying forms, swept the globe. Over the past two decades its benefits have improved the lives of millions of people from China to Chile to the Czech Republic. To almost all, it was a welcome antidote to socialistic societies that had morphed into repressive dictatorships under the moniker, Communism. For years the Soviet Union was able to compete against the U.S., in terms of defense and space, but at the expense of the lives of their citizens who suffered deprivation and hope. Now, with the announcement that Vladimir Putin will replace Dmitri Medvedev as President, it appears possible (perhaps not probable) that Russia could well retreat into the darkness and repression that was the Soviet Union. (Both men are members of the ruling United Russia party.) Of course, the capitalism they practice is a form of oligarchy, allowing for a small number of politically connected people to become immensely rich while the bulk of the population struggles. Any dreams Boris Yeltsin might have had twenty years ago for a more open society today appear lost.

The announcement did not come as a complete surprise. Four years ago when Mr. Medvedev was named President, replacing Mr. Putin who was constitutionally limited to two consecutive terms, there was speculation that this might be the result. But the timing was earlier than expected. Nevertheless, no matter how the decision is phrased, it likely marks further erosion in personal and economic freedoms. It is interesting to note the Presidential term has been extended to six years from four, meaning that Mr. Putin will remain in office until 2024! – Twenty years as President now seem likely plus four as Prime Minister. As the Wall Street Journal reminded us yesterday, Russia is what Mr. Putin once called a “managed democracy.”

In addition to their varied backgrounds – Putin was a Colonel in the KGB and Medvedev was a policy wonk, first in the office of the Mayor of Moscow and later in the presidential office – fundamental differences distinguish the two Russian leaders. Medvedev has always been more accommodative to the West than has Putin. Alexei Kudrin has long been a close advisor to Mr. Putin. He has been Finance Minister since 2000, but apparently quit over the weekend when informed that he would be working directly for Mr. Medvedev who would become Prime Minister. While Medvedev has lobbied for entry into the World Trade Organization, Putin has argued for greater protectionism and for building a trade bloc of former Soviet republics – perhaps an explanation by four former members of the Warsaw Pact last spring to form a battle group within the Visegrad Group . The decision by Mr. Putin will likely elevate and hasten the desire of former Soviet satellites to put a missile defense system in place – and not just against Iran. For the U.S., that decision may mean that our state department will have to re-set the re-set button that was never fully reset two and a half years ago.

Despite Mr. Putin’s apparent desire for greater protectionism – an admission, in my opinion, of an inability to compete globally – the fact that half their economy is dependent on energy has meant that they have had to work deals with foreign companies and countries. But companies strike deals with Mr. Putin at their peril. Last spring, British Petroleum’s deal with Rosneft (Russia’s state owned oil company) collapsed when BP could not work out a deal with its partners in its 50-50 owned joint venture, TNK-BP, a group headed by Russian billionaire and Putin ally, Mikhail Fridman. That opportunity, to drill in the oil-rich Arctic has now been offered to Exxon-Mobil who will partner with Rosneft. Success in Russia can mean nationalization. In 2006, Royal Dutch Petroleum, after spending $20 billion off Sakhalin Island was forced to sell half its stake to a Russian state-owned oil company. The law in Russia can be altered to fit the requirements of the plaintiffs. The judicial system serves at the whim of the President. The law in Russia is not held in the same esteem as it is in real democracies.

Reactions around the world to the changes in the Kremlin are clearly divided. Western Europe is dependent on Russian energy. Gerhard Schröder, former chancellor of Germany, is chairman of Nord Stream, a gas pipe line linking Russia to Europe across the Baltic Sea; the company is a subsidiary of Gazprom, the largest producer of natural gas and Russia’s largest company. Thus, for obvious reasons, Western Europe will work with whoever is in charge in Russia, as will the United States. On the other hand, former satellite Soviet nations – Eastern Europe and the Baltic states – see the changes as representing a re-assertive Russia.

The crisis in the European Union, according to Stratfor, may have hastened Putin’s decision. He may have felt the need to reassure the Russian people that the financial crisis will not impact Russian financial institutions. But Putin may also see the fracturing of Europe and especially the divisions within NATO, as a pending crisis that would be a terrible thing to waste. Western Europe believes that NATO should have a close alliance with Moscow. On the other hand, Eastern Europeans believe NATO should serve as a barrier against a resurging Russia.

The Russian people have been suppressed for centuries. The power of the Tsars was absolute. The Revolution in 1917 overthrew the Tsars, but their absolutism was soon replaced with a Communist dictatorship. Josef Stalin held power from the death of Lenin in 1924 until his own death in 1953. Under his regime, millions were deported to prisons in Siberia and hundreds of thousands, if not millions, were executed. The collapse of the Soviet Union in 1991 brought the hope for democracy and freedom. But political power remains entrenched in the arms of the political elite and money power in the hands of a few oligarchs. Together they control the country, and now it appears that Mr. Putin is attempting to further consolidate his power. For the Russian people, freedom looks to be as elusive as ever.

The infamous fatalist attitude of the Russian people was summed up by the writer Viktor Erofeyev in an article written by Ellen Barry in Monday’s New York Times. Ms. Barry writes of Mr. Erofeyev: “He shrugged off the notion of lasting disappointment and predicted that Russians would adjust by turning their attention inward. ‘This is a country that teaches you to look after your life and not fall into depression.’” But Russian novelists from Tolstoi to Solzhenitsyn suggest that the soul of that great nation cannot be easily extinguished, no matter the attempts of autocrats like Putin and regardless of the discouraging words from Viktor Erofeyev.

Monday, September 26, 2011

"Light Bulbs, Regulation and Demonization of the Tea Party"

Sydney M. Williams

Thought of the Day
“Light Bulbs, Regulation and Demonization of the Tea Party”
September 26, 2011

According to a piece in Friday’s Investors Business Daily, federal regulation costs Americans $1.8 trillion a year – about 12.5 percent of our GDP. Much of that regulation is undoubtedly necessary, but is it all? Should government be telling us what kind of light bulbs we can buy? Is it helpful to us as a nation to have the NLRB tell Boeing that they cannot build planes in South Carolina? Are consumers of natural gas in the Northeast better served by delaying the construction of a pipeline from Canada? Was the protection of the Spotted Owl worth the costs to consumers of substantially higher lumber prices? The Senate, in tabling the House’s passage of a Continuing Budget Resolution, did so because the House version cut $1.5 billion from Department of Energy loan programs. One billion of those loans have gone to two companies – Tesla Motors and Fisker Automotive – that specialize in super high-end luxury electric cars, which sell for prices ranging north of $95,000. Are those investments designed to help the middle class? Robin Hood might have been morally justified because he robbed the rich and gave to the poor. But, in raising costs to consumers – of products as diverse as energy, food, lumber, cars and light bulbs – is not the state robbing the middle class and giving to favored manufacturers?

The answers to those questions will vary depending upon one’s personal political predilections and, more importantly, on one’s financial well being. I live in an environmentally protected area at the mouth of the Connecticut River, so I support and benefit from conservation efforts, knowing there is a cost. While the initial costs of regulation are borne by business, the consumer ultimately gets stuck with the tab. Spending almost 13 percent of GDP seems a very high cost, especially as we risk a slide into another recession and we have about 20 million unemployed or under employed.

Most people would acknowledge that government’s safety regulations, covering items like seat belts, appliance standards, doubled hull tankers, and most food and drugs, have generally been beneficial. However, it was the concern of a too-intrusive federal government that gave birth to the Tea Party in early 2009. To a large extent, the Tea Party is the extension of a group entitled Empower America, founded in 1993 by Jack Kemp, William Bennett and Jeanne Kirkpatrick. Their interests lay in smaller government and empowering the individual. They were pro immigration and were not part of the religious right. As I wrote several weeks ago , both political parties have used the Tea Party for their own purposes. Democrats, fearful of any grassroots movement that does not support their cause, have demonized them. They found willing accomplices in the mainstream press. They have been successful, in the sense that the words “Tea Party” have taken on a pejorative connotation. Republicans, like Michelle Bachman, have high-jacked them for her own purposes, thereby covering them with a coating of the religious right; in the process they have diluted the Tea Party’s fiscally important message.

Four years ago, President George Bush signed the Energy Independence and Security Act of 2007. The bill required general-purpose light bulbs to be 30% more energy efficient. The standards start with 100 watt bulbs in January 2012 and end with 40 watt bulbs in 2014. In a statement that defies rationality, proponents of the bill argue that that the law’s requirements will increase competition, arguing, for example, that consumers will continue to be able to buy incandescent bulbs…as long as they meet the requirement of 30% greater efficiency, which, of course, is unlikely. In reality, consumers will be left buying compact fluorescent lights that have been around for decades and carry the risk of mercury, and halogen and LEDs that may have longer lives, but are far more expensive. According to my local hardware store, fluorescent bulbs aren’t selling well because of the mercury risk, but also because they don’t last as long as advertised and, in his experience, because the plastic around the light has a tendency to melt. Free markets embrace competition. Innovation is a derivative of competition. Government does set standards, but then it should let markets compete.

Unfortunately, excess government regulation tends to increase costs, limiting competition, and risking crony capitalism, as can be seen in companies as diverse as GE, Solyndra and LightSquared – a condition President Eisenhower warned of in his January 1960 farewell speech. The speech was famous for its alerting his listeners to the risks of the “conjunction of an immense military establishment and a large arms industry.” But, a few paragraphs later he also stated: “The prospect of domination of the nation’s scholars by Federal employment, project allocations and the power of money is ever present…and is gravely to be regarded.”

Not surprisingly and demonstrating my thesis that liberals tend not to be liberal, mainstream media supports government intervention into what light bulbs consumers are permitted to buy. Gail Collins of the New York Times wrote last March, in a sanctimonious piece belittling opposition to the bill that they are, “a classic ‘Tea Party’ herd of straw horses.” Natalie Hildt of the Associated Press wrote two weeks ago: “The opposition to the bulb law seems to stem from a dogmatic belief that regulations always limit consumers’ choice…Consumers are gaining choices they didn’t have five years ago.” Really?

A government that can make you buy light bulbs, ones that my local hardware store regards as carrying some risk, is a government that could be telling us what to eat and where to live. George Orwell’s 1984 should be required reading in all schools and certainly by all those who work in the White House. Paternalism, even in a good cause, promotes dependency and dependency can lead to Socialism, and Socialism can lead to repression. It is a slippery slope that warrants caution. When her children misbehave, my daughter-in-law gives them a “time-out.” They are made to go sit outside the room, purportedly to reflect upon and atone for their sins. In an op-ed in today’s Wall Street Journal, Susan Collins, Republican Senator from Maine, suggests the United States needs a time-out from regulation. She has proposed a bill that sets a one-year moratorium on such regulation, exempting those “that are needed in emergencies.” As she writes we need “a time-out from excessive regulation so that America can get back to work.” Amen.

Friday, September 23, 2011

"The Market and the Debate"

Sydney M. Williams

Thought of the Day
“The Market and the Debate”
September 23, 2011

On a day the stock market declined 3.5%, Republican candidates held their third debate in Orlando. The market opened down sharply on Thursday, traded lower until 3:30PM and then rallied to a level approximately where it had been at 10:00AM. That suggested to market guru Laszlo Birinyi of Birinyi Associates that the initial decline was a reaction to the deteriorating situation in Europe. That may be the case, and certainly the problems of Greece do bring unpleasant reminders of the dark days of three years ago in New York.

But the market is obviously focused on problems at home as well – unemployment remains above 9%, after more than two years of “recovery;” Congress cannot pass a budget, so a threat of a government shutdown looms once again; banks that are “too big to fail” remain. Goldman Sachs, according to this morning’s Wall Street Journal is expected to post its first quarterly loss since the financial meltdown of three years ago, and numerous other problems are making headlines, converting optimism to fear.

The debate in Orlando was like a comic relief in a Shakespeare tragedy. That is not to say it was not a serious event, for it was. One of the nine people standing on the stage in Orlando could possibly become our 45th President, so listening to their words and how they handled each question is important. But it was entertaining to watch the back and forth ripostes. The debate centered on myriad economic problems plaguing our country, with its persistent unemployment. “Hope and change,” they all agreed, have been replaced with fear and despair. The lines between the two parties have been drawn and they are more highlighted than in the past. The differences are not ones of personality; they are ones that reflect very different views of the country, the economy and how it should be repaired.

The debate highlighted those depths, not only of the political differences, but the philosophical ones as well. Mr. Obama believes in the concept of statism, in which the federal government plays a crucial role in the allocation of capital. The nine contenders feel that free markets are the path to economic resurgence. Capital transfers, increased government intrusion and federal stimulus mark the current administration. Reforming the tax code, reducing regulation and becoming energy independent are the hallmarks of those who would replace Mr. Obama. Every election is deemed the most critical in a generation. Certainly this one fits that mold.

According to most viewers, Mr. Romney won the debate last night. He was animated and standing next to Governor Perry he seemed generally to get the best of him in a number of heated exchanges. However, the biggest applause went to Herman Cain when he was prompted to talk of his bout with cancer five years ago. And the best line of the evening, in my opinion, came from Governor Gary Johnson in response to a question as to the value of the Stimulus Plan: “My next door neighbor’s two dogs have created more shovel-ready jobs than our current President.”

However, as much as we might like to look out a year, it is the here and now with which we must contend. This weekend the Group of 20 will be meeting in Washington, so the weekend papers will be filled with falling confidence around the world, manifested in collapsing global equity markets, as well as the ongoing saga of the European sovereign debt crisis. While it seems to me that there is little question that Greece will have to default – and that probability appears baked into the CDS pricing on their debt – the manner in which it happens remains unknown. One can only hope, with this ultimate eventuality having been discussed for eighteen months, that banks have taken advantage of the last several months to mark down their sovereign.

In my opinion, the biggest question remains the one as to which camp will prevail – Keynesians or those who believe in free markets and smaller government. I suspect, over time, the latter. The governor of Indiana suggested recently that the country was “crab-walking” toward free markets. One can see that trend in population flows toward the west and south. Governor Daniels cited his election in 2004, Governor Chris Christie’s in 2009, and the 2010 Congressional and gubernatorial elections, which switched ten states from the Democratic to Republican states, in places like Wisconsin, Michigan, Iowa, Ohio and Pennsylvania, and gave Republicans control of the House.

But don’t expect the rancor in Washington to die down quickly. Certainly, the two parties must be able to agree on items such as budget resolutions, but the answers to our problems will not come from compromise; the answers will come when one philosophy prevails over the other.

In the meantime, sounding like an echo from yesterday, stocks by most measure are inexpensive. Trailing twelve month price earnings multiples are about twelve times. The yield on the S&P 500 dividend paying stocks is approaching three percent, while the yield on the Ten-year is only 60% of that number, at 1.7%. Oil is $79.16 versus $140.00 in the summer of 2008. The fall in commodity prices may reflect the concern of diminishing demand as global economies weaken, but they also reflect changes in the behavior of speculators, and lower prices improve affordability for consumers. While the sovereign debt crisis has the potential to create another global credit crisis, in general the world is more forewarned than it was in the halcyon days leading up to the autumn of 2008. Banks are less leveraged. Consumer savings are running around five percent today, as opposed to no savings back then. To paraphrase the ignoble President Nixon, when he spoke of us all be coming Keynesians when he removed the country from the gold standard, we have all become cynics now.

It has been my opinion for some time that we are in a trading range, and we will continue to be in one until resolution becomes clearer as to which path we are likely to travel – the one emphasizing free markets or the one focused on statism. While I believe (and I hope) it is the former, the bell has not yet tolled. In the meantime, stocks, in my opinion, are distinctly closer to the lower end of the trading band.

Thursday, September 22, 2011

“The Fed – Where is it Headed?"

Sydney M. Williams

Thought of the Day
“The Fed – Where is it Headed?"
September 22, 2011

Most central banks around the world have a single mandate – stable prices. Not so the Federal Reserve System of the U.S. The Federal Reserve was established in 1913 in response to the Panic of 1907, which, like its counterpart 101 years later, brought the financial system to its knees. Its duties include the conduct of monetary policy, the supervision and regulation of the banking industry, the maintenance of stability in the financial system and the providing of services to depository institutions. With the enactment of the Federal Reserve Reform Act of 1977, endowing the Federal Reserve with the power to “promote effectively the goals of maximum employment, stable prices and moderate long term interest rates,” the potential for conflicting goals was established.

Like most institutions, the role of the Fed has changed over the years and, unlike other government organizations, it has generally been given high marks – not withstanding the disastrous consequences of Chairman Greenspan’s easy money policy in the 00s, and despite Governor Perry’s incredible characterization of the current Chairman as “almost treasonous.”

The System is unique in that its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government. Its authority, however, is derived from Congress and is subject to Congressional oversight. Members of its Board, including the Chairman, are chosen by the President and confirmed by the Senate. The twelve regional presidents are selected by their regional bank boards – a condition that Representative Barney Frank would like to change. Four of those presidents, on a rotating basis, sit on the Federal Open Market Committee (FOMC) alongside the Chairman, the seven governors and the President of the New York Fed. Mr. Frank would also like to strip the regional banks from any voting membership. As the Wall Street Journal noted yesterday, the Congressman’s attempt reflects his preference for easy versus sound money. I agree with the Journal, in their conclusion that the regional presidents should have more, not less, influence.

Attempts by politicians to interfere in the dealings of the Fed should be resisted, and that includes not only the ridiculous meddling by Barney Frank, but also interferences like the letter sent by four Republicans Congressional leaders Monday urging the Fed to do nothing at yesterday’s meeting. While I am a fan of sound money and worry about the inflationary consequences of the Fed’s printing money at the rate it is, I am even more a fan of the Fed maintaining its independence.

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The Fed’s FOMC’s statement issued yesterday afternoon contained little of surprise; though markets focused on the insertion of “significant” when they spoke of downside risks to the economic outlook. The Fed plans to reinvest $400 billion in longer dated securities – Treasuries, Agencies and Mortgage-backed securities – as existing, short-dated positions mature. The $400 billion represents 15.4% of their $2.6 trillion balance sheet. The program should, the statement says, “put downward pressure on longer-term interest rates and help make broader markets more accommodative.” “Economic growth remains slow…and the unemployment rate remains elevated.” “The housing sector remains depressed.” The last three statements are uncomfortably obvious to anyone. The first raises the question: How low do we want longer-term rates to go? They are already at multi-decade lows. For example, the yield on the Thirty-year sold at 2.9% this morning, only 15 basis points above the 2.75% yield on the 391 dividend paying stocks in the S&P 500. (The problem is confidence, not rates.) As in July, three Fed regional presidents – Richard Fisher, Narayana Kocherlakota and Charles Plosser – voted against the action, as they “did not support additional policy accommodation at this time.”

It is interesting, however to look back over the past thirty-two months and, as President Obama admonished his listeners on Monday, to look at the math, or at least the numbers. In January 2009, a week after Mr. Obama was sworn in as President, the Fed lowered the Fed Funds rate to a range of 0.0% to 0.25%. This was despite the fact that the credit markets, as measured by the TED spread, had shown remarkable improvement by December 2008, from its high in October. Fed Funds have continued at this low level. During the intervening thirty-two months, the Fed has expanded its balance sheet by about $300 billion to $2.6 trillion.

In the months since, some of the news has been good. Gold has risen 92% and stocks are up 42%. Treasuries have rallied with the yield on the Ten-year declining 30%; existing single family home prices are up 6.5%; the NBER declared the recession over as of May 2009, and thirty-year conforming mortgage rates have declined 21%, from 5.05% to 4.0% last month. Of course, for those who do not own gold or stocks and/or those who are savers, not borrowers, some of the “good” news has been bad, as the yields on T-Bills, CDs and money market funds are di minimis.

Some of the news has been bad. The Dollar has declined 10%, inflation has eroded purchasing power by 5%, unemployment has risen from 7.6% to 9.1%, and whatever economic recovery we had in 2009-2010 slowed noticeably in the first half of this year. GDP, which averaged 4.2 percent in the second half of 2009, declined to 2.8 percent in 2010 and then fell to 0.9 percent in the first half of 2011.The results – the math – suggest that the Fed’s actions have been the equivalent of pushing on a string, and one suspects the Administration’s focus on an $800 billion government spending bill and a massive healthcare overhaul would have been better spent on easing, not tightening, regulations, and implementing tax and entitlement reform.

In the late afternoon yesterday, the market voted on the Fed’s decision, with the Dow Jones Industrial Averages declining 2.6% in the one hour and forty minutes following their announcement. Mr. Bernanke and most commentators have referred to the Fed’s decision as the “twist,” named, they claim, after Chubby Checker’s song of that name, a dance I vaguely remember doing fifty years ago. I would suggest that it might more appropriately be named after Charles Dickens’ character in his eponymous novel, Oliver Twist. Oliver was an orphan, treated cruelly in his early years, and so was perhaps named “Twist” by Dickens for those troubled souls who did so much to damage Oliver’s will.

As to where the Fed is now headed, I don’t know; I worry more about the lack of a coherent fiscal strategy.

Wednesday, September 21, 2011

"The Payroll Tax Holiday - A Bad Idea"

Sydney M. Williams

Thought of the Day
“The Payroll Tax Holiday – A Bad Idea”
September 21, 2011

Of all the stimulus measures taken, the one that received the most bi-partisan support was the temporary reduction in the portion of the pay roll tax paid by individuals from 6.2% to 4.2%, in a bill passed last December and which terminates at the end of this year. The President is urging its extension; this time, though, doubts are being expressed. It should not be a surprise that the original bill was endorsed by both the President and Congress, because its positive impacts would be felt immediately, and because no one in Washington (apart from a select few) give a damn about the longer term consequences of their actions. From my perspective, it is a good thing that its merits are now being debated. Curiously, detractors now include such disparate politicians as Republican Paul Ryan of Wisconsin (author of “A Roadmap for America’s Future”) and Independent Bernie Sanders of Vermont, a self described democratic socialist.

The President has proposed reducing the payroll tax for individuals from the current 4.2% to 3.1% for 2012, and doing the same for corporations on the first $5 million in wages paid. The tax is imposed on the first $106,500 of an employee’s wages. Its purpose is to fund the Social Security System, a fund badly in need of shoring up. The reduction of the tax this year – from 6.2% to 4.2% for individuals – is expected to cost $112 billion in 2011. A further cut, as the President proposes for 2012, would cost an additional $240 billion in 2012. Liberal Democrats fear that it jeopardizes Social Security, meaning that its funds would be exhausted by 2021, instead of 2037. They are right to be fearful. Fiscal conservatives are concerned about the negative economic consequences of restoring the tax in 2013. They are also right to be concerned. Temporary tax relief is never a good solution.

In March of 2010, Mary Williams Walsh wrote a piece for the New York Times in which she reported that the Congressional Budget Office said that Social Security, for the first time, would pay out more in benefits in 2010 than it would take in. Stephen Goss, chief actuary for the Social Security Administration concurred with that opinion. The timing was auspicious, as Ms. Williams wrote, for it would be the “first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.” When the Simpson-Bowles deficit commission issued their report in November 2010, they recommended three steps toward achieving solvency: Gradually raise the retirement age to 70; lower the cost of living adjustment, and change the formula for calculating benefits. Instead, as we all know, the President chose to ignore the recommendations of his Commission. He then further denuded the System by depriving it of badly needed cash – a fiscally irresponsible decision, in my opinion. The situation has become worse. Fox Business reported in April of this year that “U.S. households are now getting more in cash handouts from the government than they are paying in taxes for the first time since the Great Depression.”

The retirement problem is as daunting as any we face. Ten thousand baby-boomers retire every day and will continue to do so for the next seventeen years. Collectively, they represent 75 million people. For the forty years following World War II many retirees relied on a combination of Social Security and the defined benefit retirement plans of the companies for which they worked. It was an age of big business and big factories. There was an assumed efficiency in size. An ever expanding body of employees eased funding requirements. Rising stock prices (during many of those years) added value to the funds. Demographics favored the retirees, with 5.1 workers supporting every Social Security recipient in 1960. Today that number is closer to three. The numbers were similar for private pension plans, most of which have been terminated.

Beginning in the 1960s, and then accelerating over the next two or three decades, automation began replacing people. “Productivity improvement” became the words “du jour.” Technology proliferated and companies downsized personnel. By the 1980s, with smaller workforces supporting a growing number of retirees, companies, seeing the “hand writing on the wall,” either altered or cancelled their defined benefit plans, replacing them with defined contribution ones. The golden age for retirees was coming to an end.

The problem of inadequate retirement assets was masked by the bull market of the 1980s and 1990s. For the twenty years ending December 31, 2000 the compounded return to the Dow Jones Industrials was 12.83% before dividends. (To put those returns in perspective, the twenty-year return coming off the absolute low in the DJIA in 1932 was 9.9%. Similarly, twenty-year returns to that index following the December 1974 low was 9.8%.) Unsurprisingly, many companies, for actuarial purposes, assumed those rates of return would persist into the ‘00s. They did not. Equity prices are lower today than they were at the end of 2000. As a result, many of those companies that still have defined benefit plans are generally underfunded. More serious though, employees, left to fund their own plans, have not made the necessary contributions, and what contributions that have been made have seen very little, if any, price performance.

As a result, most people are woefully unprepared for what will prove for many to be a third of their life. Social Security was always meant to be a safety net, not a means of providing a comfortable retirement. Nevertheless, the system is already on life support. Changes will be necessary, such as upping the retirement age, conducting a means test, or increasing the level of income on which benefits are collected. If this is not done, there will be no safety net. Providing a “Holiday” for employees (and employers) does not make sense, as it exacerbates what is already a shortfall.

However, ever the optimist, I believe answers will arise. Mitch Daniels, Governor of Indiana, recently said, Americans have a “built-in capacity for self correction.” He is right. Fixing Social Security will involve altering the formula, as indicated above. A combination of easing immigration regulation and increasing birthrates would ease the pressure. Bryan Caplan, in the introduction to his book, Selfish Reasons to Have More Kids, writes: “Parents who have more kids aren’t just doing future retirees a favor; they’re also making the tax burden on future workers a little more bearable.” Just because answers are not apparent doesn’t mean they don’t exist. But that is no excuse for depriving the Social Security System of the money it needs today. There has to be a better way; one that involves reforming the tax code and entitlements. Reducing payroll taxes makes little sense.

Tuesday, September 20, 2011

"The Buffett Rule, The Deficit - How to Pay for It"

Sydney M. Williams

Thought of the Day
“The Buffett Rule, The Deficit - How to Pay for It”
September 20, 2011

Mr. Obama chose to hit the campaign trail yesterday. In a populist speech, billed as an attempt to further bi-partisan talks with Congress in the hope of finding common ground for reducing the deficit, the President evoked the name of America’s number one elite – Warren Buffett, the sage of Omaha who sits on a net worth of approximately $50 billion, and who is perhaps America’s foremost expert when it comes to finding ways to legally avoid the taxman. After a career spent investing after tax dollars for long term capital gains and at the age of eighty-one, Mr. Buffett concluded that his tax bill is too low. Instead of simply writing a check for five or ten billion dollars to assuage his conscience, the sanctimonious, Mr. Buffett decided that what is right for him, at his age and with his wealth, should also be fair for anyone making more than a million dollars, regardless of their net worth, their age, or even if they are a business entity. Today, those filers represent 0.3% of all tax payers and pay 38% of all federal income taxes. So, what is fair? The President concurred with Warren Buffett. In Mr. Obama, Mr. Buffett found a kindred spirit. In Mr. Buffett, Mr. Obama has found the means to help pay for what will prove to be the most expensive political campaign ever waged.

Of course, in order to come up with the $1.5 trillion in tax increases Mr. Obama proposes, he needs to dig down to those with lower incomes. More than half of the tax increases will come from raising taxes in 2013 on those making more than $250,000. The number of households with incomes above a million dollars is about 34,500. The number of households with incomes above $250,000 is over 2.2 million. It is math, as the President realizes.

The “Buffett Rule”, as the Wall Street Journal makes abundantly clear, is simply a resuscitation of the Alternative Minimum Tax (AMT,) proposed by the Johnson Administration and signed into law by that master of finance, Richard Nixon. That tax was originally aimed at 155 tax returns that reported income above $200,000 and which paid no taxes. Today, twenty-one million returns are subject to the AMT. When the government wants more money it knows where to go.

One thing we know for certain is that Mr. Buffett has very little in common with the average American. As we are all well aware, wealth in our country is skewed toward the very rich. As deplorable as that may be to many, it is the way things are now and the way they have been for thousands of years; it will remain true as long as people are allowed the means to generate wealth. In this inverted pyramid, the base is very wide and the peak extremely narrow. Household net worth, according to data from the Federal Reserve’s flow of funds, is valued at $58.5 trillion, ten percent below where it was four years ago. The bottom 80% of households (about 92 million) own 15% of the assets, or roughly $92,000 per household. The top 20% have a household net worth of roughly $2.2 million; however, the wealthiest four hundred households own an estimated $1.5 trillion, or about $3.75 billion per household. Obviously there is a big difference between the “Über” wealthy and the merely rich – an oversight that seems to have escaped Mr. Obama.

I was pleased to hear the President call for tax reform, making it simpler and fairer. That is an idea with which we all can agree. The difficulty arises in defining “simpler” and, more importantly, “fairer.” Despite the President’s persistent repetition to the contrary, there is not one American – including the most conservative Republican – who does not want to see tax receipts rise. The difference lies in how such increases in revenues are achieved. In August of 2009, before the National Bureau of Economic Research (NBER) had called an end to the recession, Mr. Obama, famously said, “The last thing you want to do is raise taxes in a recession.” We might not now be in recession, according to the NBER; however, with GDP in the first half of the year growing less than one percent and with over twenty percent of the workforce either unemployed or underemployed, people sure don’t feel like we are in recovery. Mr. Obama’s decision to raise taxes now would appear to violate the spirit of his earlier words.

It was disappointing that no mention of entitlement reform was made other than some mention of future savings from Medicare due to the passage of the Affordable Healthcare Act. Good luck with that. The opportunity Mr. Obama missed was in not endorsing the findings of his deficit commission a year ago. If Republicans had fought the recommendations of that panel they could now truly be called the “Party of No.” While Mr. Obama continues to toss that label in their direction, the truth is that Mr. Obama has become the leader of the “Constant Campaigners.”

The only concern all parties should have is how to get the economy growing again, recognizing the restraint that deleveraging will have on a consumer-centric economy. The answer has nothing to do with class warfare or protecting “millionaires and billionaires.” It should be, as the President suggested in his speech yesterday, a question of math. Exports, as the President has often repeated, should be a focus, yet the three trade bills famously sit on his desk, held up by unions, relics of another age. Economic growth would benefit from both tax reform and entitlement reform. Addressing such matters forthrightly would instill confidence in the people, our companies, our trading partners and our creditors.

The Policy Center of the Brookings Institute, a left of center think tank, recently prepared estimates for federal revenues and outlays through 2016, based on numbers from the Office of Management & Budget (OMB.) For the five years beginning in 2012 they project receipts to rise from $2.173.7 trillion in 2011 to $3.819.1 trillion in 2016, a 75% increase over that five year period. Over the same time, they project expenditures to rise from $3.728.7 trillion to $4.467.8 trillion, a modest 19.8% increase. Looking back over the postwar period, I was unable to find any five-year period that experienced that level of growth in receipts, and I was only able to find one period (1995-2000) when expenditures grew at a lesser rate. Optimists rule the roost at OMB.

The answer to our deficit problem must be a combination of spending reductions and revenue increases, but the revenue increases must come from renewed economic growth. So the focus of the President and Congress should be solely on restoring economic growth. Over the past few years positive suggestions for restoring growth have been made by the Simpson-Bowles Commission and others, including Representative Paul Ryan. The President risks being a one term President if he continues to listen to those on his extreme left, like unions who are mired in nationalism and the past, and in those of a Keynesian bent who say “damn the deficits, let’s spend like it’s Saturday night.” He needs the Independents. The first stimulus failed. The second will as well. The government needs revenue, and revenues will come only with growth.

Monday, September 19, 2011

"Scandals - Lessons in Responsibility? We'll See"

Sydney M. Williams

Thought of the Day
“Scandals – Lessons in Responsibility? We’ll See”
September 19, 2011

As the President traverses the country with his pitch to pass his jobs bill “now,” he insists his message is about governance, not about politics. We must, he says, get America back to work again. He’s right. With more Americans out of work today than when he took office that needs to be the priority! But, we hear no words reflecting an admission of responsibility for our current state of affairs. The buck no longer stops at the Oval Office. Usually it is Bush’s fault, even though Mr. Obama has been in office thirty-two months. Recently there have been Congressional Republicans and acts of God that are being held responsible for our sad state of affairs.

An op-ed in Friday’s New York Times had lessons for us all, including the President. David Roberts, a mountaineer and author of several books on climbing, authored a piece entitled “Exploits, Now Not So Daring.” His message was about responsibility. In his world, satellite phones, GPSs, helicopters and radios have altered the parameters of risk taking when it comes to climbing. He relates a couple of stories. One dealt with the Italian Walter Bonatti who, in 1955, became trapped on the Petit Dru in the French Alps. Alone, Mr. Bonatti had to rely on his own ingenuity to eventually free himself from a harrowing situation. The second tells the story of two climbers, one German and the other Japanese, who found themselves stuck on Ama Dablam, “a moderately difficult peak near Everest.” They radioed for a rescue, but in the first attempt one helicopter clipped the slope plunging it 6000 feet, killing both the pilot and the engineer. Both men were saved by a second helicopter.

The message of self responsibility is important. It applies to rogue traders on Wall Street, to homeowners on Main Street, to politicians like Congressman Barney Frank, Senator Chris Dodd and others who encouraged recklessness at Fannie Mae and Freddie Mac. Increasingly our society has become permissive of allowing people to remove themselves from the consequences of their action. On Wall Street it became a “heads I win, tails you lose” situation. The same appears to be the case at the White House where blame for the economy is anybody’s fault but their own. Unfortunately that lesson is taught in many of our schools where students are praised and rewarded regardless of performance, based on the premise that it is more important to make a child feel good about themselves, than for that child to learn success through failure.

This avoidance of responsibility has become manifest in a series of scandals sweeping the Administration. All Presidential Administrations are subject to scandals. The President is always removed from the actual events, and in most cases unaware of the wrongs being perpetuated, or the harm being done to the Office. But, it is the President who sets the tone and it is he who is ultimately responsible.

Three scandals now threaten the positive perception most people have of the character of Mr. Obama. The first is “Fast and Furious,” a DEA gun-running caper gone awry. Ostensibly its purpose was an attempt to track down illegal buyers of weapons, especially those selling weapons to drug cartels in Mexico. Unfortunately (and idiotically) the DEA lost track of weapons that ended up killing American law enforcement personnel. While it has been shown that elements from the White House and the Justice Department were involved in the program, responsibility for its unfortunate consequences has yet to be assumed.

The Solyndra scandal is potentially more devastating to the Administration. The problem is not the loan; the U.S. government has a long history of investing in fledgling industries. The problem is the connection of George Kaiser, who is both a major investor in the company and who is a principal fund raiser and donator to Mr. Obama. The allegation, if true, that a recent loan from Mr. Kaiser, or one of the investment firms he controls, to Solyndra comes before the government in the event of bankruptcy appears unethical and possibly illegal. Someone will have to assume responsibility. The Energy Policy Act of 2005 stipulates that outside investors are not permitted to jump ahead of the government in a default. The President and his administration are obviously concerned. Solyndra had been the center piece of his “green agenda” when he visited the company in May of 2010. During his “Jobs” speech two weeks ago, there was no mention of a “green agenda.”

The third scandal surrounds LightSquared, a satellite network company owned principally by Phil Falcone owner of the hedge fund, Harbinger Partners. Phil Falcone is a major donor to Mr. Obama and the Democratic Party. The protestations surround the fast-tracked approval by the FCC for LightSquared to invest $14 billion to build a national wireless network utilizing 4G technology. The approval came despite the protestations of NASA, the Department of Trade, the Department of Justice and (unsurprisingly) virtually the entire GPS industry who argue that LightSquared’s proposal will cripple current GPS systems and threaten national security. The most damning piece of news was the allegation by the “Daily Beast” that General William Shelton, head of the Air Force Space Command, was pressured to change his testimony to support LightSquared.

It is the avoidance of responsibility for these scandals – the passing of the buck – that ultimately has serious consequences for our society. President Kennedy, after the failure of the Bay of Pigs and accepting responsibility, said: “Success has a thousand fathers; failure is an orphan.”

As mentioned above, Washington is not alone in being inflicted with a bad case of NMF (Not My Fault.) The question of failing to take responsibility for the consequences of one’s actions is a growing, societal issue. As mentioned above, it is taught in our schools. Litigation attorneys have personally made millions of dollars convincing juries and judges that it is the cigarette, the weapon or the car that is responsible for injuries or deaths. According to their arguments it is not the fault of the individual who chose to smoke, the person who willfully fired his gun, or the one who totaled his car. This is not to argue that manufacturers do not make mistakes and at times take shortcuts that produce a damaged or error-prone product. They do and they should be held responsible. But, in immunizing the people from the consequences of their own actions, the pendulum has swung too far.

Thursday, September 15, 2011

"Will Nationalism in Europe Trump Unity?"

Sydney M. Williams

Thought of the Day
“Will Nationalism in Europe Trump Unity?”
September 15, 2011

The natural tendency for those whose job or inclination is to make predictions is to extrapolate recent experiences. Thus, for a skeptical reader of predictions it is important to understand the circumstances in which they are made. Europe, in that regard, represents a conundrum. While political leaders like Angela Merkel are doing what they can to maintain a common currency, an increasing number of pundits have joined Niall Ferguson in predicting its failure.

Martin Wolf wrote in Wednesday’s Financial Times, that a failure would mean Germany, the engine of Europe’s economy, would experience soaring exchange rates, a massive decline in exports and a sharp fall in GDP. Through their export-dominated economy, Germany has been the principal beneficiary of the Euro. The global slump has kept all interest rates relatively low and they have profited from a currency kept down because of the PIIGs nations. They would be a significant victim should it fail. Besides the impact on their economy, as Mr. Wolf elucidates, the effect on their banks would be damaging, as they carry loans that would have to be written down substantially. Should the Euro fail, which seems at least a possibility, markets would become chaotic. In that eventuality, creditors will suffer alongside debtors.

Recently, Poland’s Finance Minister Jasek Rostowski warned that the European Union would be unable to withstand a breakup of the Eurozone. Such an event, he suggested, could make wars in Europe imaginable again. While it is hard to conceive that such a seemingly impossibility could become reality, it is worth recalling the attitudes as the “long Edwardian summer” was coming to an end in 1914 Europe. A few years earlier, in 1902, the American economist John Bates Clark wrote an essay imagining himself in 2002 looking back over the century. He wrote that only the uninformed would predict war, “as if nations bound together by such economic ties as now unite the countries of the world would ever disrupt the great industrial organism and begin fighting.” The American economist Irving Fisher infamously agreed with him, writing in early 1914 that there would be no war, because the nations were economically as one.

George Friedman, in the September 13 issue of Stratfor, raised the question: “Does Greece or Portugal really want to give Germany a blank check to export what it wants with it, or would they prefer managed trade under their control?” The deeper worry for Mr. Friedman, though, is nationalism. In the same essay, he writes: “European nationalism has always had a deeper engine than simply love of one’s own. It is also rooted in the resentment of others.” The consequences have been wars that have swept across the continent for centuries. “Historically,” Friedman adds, “the Europeans have hated well.”

When a country (just like an individual) gets in over their head financially there is no simple or painless exit. Bankruptcy, default or a work-out are the only options. In all cases, bondholders suffer. And, of course, skeptical creditors will be slow to extend future credit and, when and if they do, will demand higher rates. A work-out or default without bankruptcy implies that income must go to debt repayment, rather than for investment to fuel future economic growth. The effect is not dissimilar to the U.S. where deleveraging has been the principal cause of slow U.S. economic growth. In a world in which goods and money chase one another around the globe, it is in everybody’s interest that the crisis gets resolved; so it is unsurprising that both Germany and France have been sounding out that Greece will remain in the Eurozone. It is also not a surprise that the BRIC nations are debating possible Eurozone aid. But it is also true that none of these nations are naive. Like Shakespeare’s Shylock in Merchant of Venice, they will demand their “pound of flesh.”

Despite the fact that the crisis in Europe has been going on for some time, it is only now beginning to impact the lives of their citizens. The FT reported yesterday that Mr. Papandreou is expected to announce further reductions in public sector workers next year, suggesting they may lay off another 40,000. To put that number in perspective, that would be the equivalent of the U.S. laying off about 1.2 million employees – an event, while necessary, that will unlikely occur quietly. You can bet that angry Greeks will lay the blame not on themselves or their own government which indulged their demands, but on the Germans and the French – another match striking the timber that is nationalism.

This refusal to accept the inevitability of change, which will manifest itself in increased poverty and perhaps lessened civil rights, is seen in the strikes that plague many European nations. It is the fear that nationalism may trump acceptance of a new normal in incomes and living standards for the vast majority of people that risks anger turning to defiance and defiance turning to arms.

The best news regarding Europe, unlike a century ago, is that very few are speaking in the rosy terms they were a century ago. A hundred years ago Europe had experienced four decades of peace (since the Franco-Prussian War in 1870-71) and the British had not had armies in Europe since the Napoleonic Wars ended at Waterloo in 1815. The Twentieth Century was the most costly, in terms of human life and dollars, the world has ever known. That fact has made us more cynical. Cassandra-like, not Panglossian, would better describe most economic and financial commentators today. That is not to say a failure of the Euro would not have repercussions. It would. But it is also possible that a German-centric Euro might lend strength.

The recent deep economic recession and near credit collapse have magnified weaknesses in the European Union and the Eurozone. Importantly, these events have affected our psyche and therefore our predictions. We are conditioned for bad news. A rise in nationalism does seem inevitable, but it may be no more than growing pains. While it bears watching, it certainly does not necessarily end in armed conflict. Historically, common currencies have never come quickly or without conflict. In the United States, it did not happen until the conclusion of the Civil War. It certainly seems possible that the composition of Eurozone members may change, but it does not seem to me that its end is written on the wind.

Wednesday, September 14, 2011

"Pass This Bill Now!"

Sydney M. Williams

Thought of the Day
“Pass This Bill Now!”
September 14, 2011

As promised, on Monday President Obama sent his jobs bill, the American Jobs Act of 2011, to Congress, including his proposals for tax increases. When some huckster comes by whispering, “Have I got a deal for you!” one’s hackles rise. Similarly, when a President who is a master of political divisiveness suggests Congress should put aside “political games” and pass his new $447 billion stimulus plan “now,” the unsurprising reaction from Congress is the same – suspicious.

As well it should be. Data from the U.S. Department of Census yesterday showed that income fell to its lowest level in more than a decade. In the two years of the Obama Presidency, household income declined 2.3% (despite the “recovery” beginning in May 2009) and the proportion of people living in poverty climbed to 15.1% from 14.3%. While all the blame cannot be attributed to Mr. Obama, those numbers certainly reflect the failure of his policies to counteract the recession. And now, with his Jobs Act, he wants to do more of the same?

Political partisanship is as old as the Republic. It ebbs and flows, but never disappears. Recent polarization dates back to the disputed 2000 Presidential election that elevated George W. Bush to the Presidency, despite his not having received as many popular votes as Al Gore. Democrats, like jackasses with the memories of an elephant, never forgave Mr. Bush. Those bad feelings later morphed into policy disputes regarding the conduct of the War on Terror and later the handling of the economy following the credit collapse.

The President’s proposal does borrow some ideas from previous Republican suggestions, but ignores others. A widened and flattened tax system, with fewer deductions, has long been part of Republican rhetoric. The President accepted the limiting of deductions, but said nothing about tax reform. His arbitrary elimination of certain tax deductions and an increase in taxes on carried interest without a concurrent overhaul of our cumbersome tax code appears designed to go down in defeat. There are those that suggest his bill was nothing more than a “dare,” populist political bait for the Republicans to not pass it, which one astute commentator assumes is what Mr. Obama really wants.

The President’s refusal to simplify the tax code is based on the spurious concept that to do so is too complicated; it would take too long and the need to act is “now.” Interestingly, however, the President never felt that his 2000+ page healthcare bill (we are still finding out what was in it) or his financial reform bill (of similar length) were too complicated.

The essential problem facing the country is a lack of confidence that individuals and small business have in the direction the country is moving. While politicians are concerned about the two-year election cycle and the shifting winds of the polls, the horizon for business people is measured in years. The duration of the President’s recommendations are the reverse of what they should be. The tax cuts the President has proposed are all temporary. His proposed tax increases are permanent, as will be his “investments,” a euphemism for spending.

Because of the recent dramatic increase in government debt, a function not only of the failed stimulus plan, but also due to the growing realization that entitlements supported by both parties over the past several decades are in serious jeopardy, government’s options are limited. In today’s Wall Street Journal, Peter Wallison writes: “There are only two ways for the U.S. to address the debt and entitlement obligations it has already assumed – inflating the currency and increasing the rate of growth.” The latter is the most optimum, but it is the former that is the most likely. Economic growth depends upon tax reform, including eliminating the penalty on repatriating foreign earnings, and passage of the three trade bills that have sat on the President’s desk, held hostage by unions. It also requires simplifying regulation, so that business can again begin the process of hiring.

An elemental concept the Administration has never seemed to grasp is that it takes five or six private sector jobs, at the minimum, to support one government job. Government workers do not manufacture products or generate services which are sold into the market place. They do not produce profits for shareholders or owners. It seems hard to believe, given the attitude of so many of them, but they actually work for us! It should be for us to decide how many people we want serving our needs.

All politicians when on the ropes resort to tried and proven declamations. Liberals offer populist slogans that demonize the rich, comments about “millionaires and billionaires”, when the tax increases necessary must be levied on “thousandaires.” The President’s plan does have the seeds to start a conversation, but then so did the Bowles-Simpson Plan, which he tabled and so did Paul Ryan’s, which he ignored. The President’s problem is that he has proven to be an ideologue, a trait that is out of sync with the American character. We see it in is his demand – mentioned seventeen times in his speech introducing the American Jobs Act – that the bill must be passed “now.”

Tuesday, September 13, 2011

"Trees Hidden by the Forest"

Sydney M. Williams

Thought of the Day
“Trees Hidden by the Forest”
September 13, 2011

In the short term, behavior, as much as a company’s fundamentals, influences stock prices. Over the longer term, a company’s earnings, cash flows and balance sheet determine values. Unfortunately for most of us, human nature causes a focus on today, at the expense of tomorrow. We are children of the time in which we live, and for better or for worse ours is the internet age. The ubiquitous nature of the internet and the plethora of information it disperses means that one can find whatever information one chooses to support whatever cause one champions. No human is capable of digesting the superfluity of data we receive, ergo computers designed to ingest the information and produce algorithms to buy and sell stocks with holding periods measured in seconds. It is the forest, not the trees that is of interest to such investors.

This glut of information has been responsible, at least in part, for turning us into a nation committed to the short term. We have become an attention-deficit-disordered society, letting hundreds of data points dictate our daily activity. The concept of thinking about issues seems as old fashioned as hand-cranked car windows.

What prompted this thought was an interview in Monday’s Wall Street Journal with Richard Sylla, financial historian at New York University’s Stern School of Business. For 200 years, Professor Sylla notes, U.S. stocks, adjusted for dividends and inflation, have risen and fallen in surprisingly consistent waves. “When ten-year-average returns dip below 5% and especially when they turn negative, as they did in 2008-2009, markets tend to bottom out and begin a recovery, the figures show.” At other times, when average returns are 15% or above, investors get over confident. His analysis provided a prescient warning in 2000.

Of course when dealing with such time frames there is no precision. At the end of the interview, the professor added: “We may not be able to get enlightened government policies until things get worse than they are now, which isn’t a happy thought, but in the longer run, I think the country is going to recover and go on to prosperity as it always has.”

We weren’t always obsessed with short term price moves. In 1925, Russian economist Nikolai Kondratieff published his major opus, The Major Economic Cycles. He laid out his theory that the economies of capitalist countries rise and fall in 50-60 year cycles, moving from expansion through stagnation to recession. Stock markets follow suit. It has been my experience that an increased attention in Kondratieff is inversely related to economic and market cycles. Unfortunately, his own life ended early. Stalin had Kondratieff arrested in 1930, using his opposition to the total collectivization of agriculture as an excuse. He was executed in 1938 at the age of 46, depriving him the opportunity of living through one of his complete Kondratieff Waves.

A practical manifestation of the benefits of longer term investing is depicted in a recent note to investors from Jim Cullen, (“The Recovery Phase – Update.”) Jim is President of Schafer-Cullen Investment Management based in New York. Depicting five-year rolling investment returns, the study covers the thirty-nine five year periods dating from 1968 through 2010. (For purposes of full disclosure, Schafer-Cullen manages most of my equity assets.) Mr. Cullen, using the bottom twenty percent of the S&P 500 sorted by P/E, demonstrates that in only two five-year periods have compounded annual returns been zero or less – once in 1969-1973, when they were zero and secondly in 2004-2008, when they were a negative 2.3%. However, the five five-year periods that include the 20% stock market crash of October 19th 1987 were all positive. It would, though, be a surprise to me if the returns during the five-year period ending 2011 were positive, as the starting point was near the market highs. Regardless, what should be important for investors are the five-year double digit compounded returns that typically follow the fallow ones.

Market timing is more an art than a science. While there are professional investors who can do so successfully, most people cannot. The reason is behavior. We are elated when things go well, we party too long – greedy to the end. We drink and eat too much, then fail to notice the orchestra has departed until the cleanup crew is mopping the floor. When markets fall into disrepute, as they now have, fear dominates. The Panglossians among us are overwhelmed by the more articulate Doomsayers. The latter’s reasoning is based on fact, while the former can only estimate a misty future. Facts are only available when one looks backward. Forecasts, definitionally, depend on guesswork.

One of the many problems that those of us who take a “longer” view have is that there is no way to predict a turn. Money managers are caught between doing what they believe is in the best interests of their customers, and dealing with the fear our economies and political leaders have created. That fear is generally accentuated by a media more interested in the hyperbole that sells advertising than in offering good guidance. In his book, A Tract on Monetary Reform, Keynes once wrote, “in the long run we are all dead.” He was writing of his belief that controlling inflation was only possible with government intervention. But to many portfolio managers the words are applicable to our current situation. We may know in our hearts that bull markets will return, but how long do we have to wait? Will I have any money or any clients when the turn comes? We can no more predict the return of the orchestra, than we could its leaving. We just know that the orchestra leader will, at some point, again pick up his baton.

Studies have shown that most people are better off toughing it out through these periods, finding stocks at reasonable multiples, ones with dividends capable of growing. It is the argument for indexing and against market timing. It is not exciting and will never provide the most optimum returns, but it will prevent selling at bottoms and buying at tops, unfortunately the fate of most mutual fund investors.

When investors are so focused on massive events, such as the fiscal crisis in Europe or the debt and unemployment picture at home – acts over which we have little control and are not really subject to analysis – individual stocks are left to languish, providing opportunity for patient investors; as long as they have the stomach to withstand the volatility characteristic of markets in disarray. But don’t let the forest prevent you from seeing the trees.

"A Reaction, Not a Thought"

Sydney M. Williams

"A Reaction, not a Thought"
September 12, 2011

Arthur Laffer, in this morning’s Wall Street Journal, quoted the late Irving Kristol: “It takes a PhD in economics not to be able to understand the obvious.” It is a line that I have long felt was particularly applicable to Paul Krugman, Nobel winner for economics and columnist for the New York Times. But I always read Krugman with a smile, sensing his “bad boy” antics were deliberately contrived and part of his act.

However, his recent blog, “The Conscience of a Liberal”, suggests a man who so filled with venom for those he dislikes that he is incapable of thinking clearly. In this piece he refers to “fake heroes,” like Bernie Kerik, Rudy Giuliani and George Bush. He suggests that the “atrocity of 9/11” has been hi-jacked by those that have used the attack for their own purposes. As a result, he writes, “The memory of 9/11 has been irrevocably poisoned; it has become an occasion for shame. And in its heart, the nation knows it.” He could not be more wrong.

While my first reaction was anger, on reflection it was sorrow I felt for the man. Anyone who is this angry in print must be even angrier in spirit. Skepticism is healthy in the way we view others, especially our political leaders. We endow them with too much power to blithely and blindly obey them. But there are lines of civility that should not be crossed. Mr. Krugman went over that threshold yesterday, but in doing so he makes himself seem the less significant for having done so.

Mr. Krugman concludes that he will not allow comments on this post, “for obvious reasons.” In not permitting and then reading comments, it allows him to wallow in his vitriol, alone and forlorn, and deservedly so.

Monday, September 12, 2011

"Age and the Workplace - A Looming Battle?"

Sydney M. Williams

Thought of the Day
“Age and the Workplace – A looming Battle?”
September 8, 2011

The New Yorker built its reputation, in the 1920s and ’30, for its depiction of the battle of the sexes – the eternal conflicts between men and women. The UK’s humor magazine, Punch, which was founded in the mid nineteenth century and written largely for the upper classes, poked fun at the aristocracy. In the aftermath of the recent recession, we are perhaps seeing the seeds of another battle forming – what the Financial Times recently entitled: “A Battleground for the Generations.”

There are three parts to this potential battleground – one is demographic – an aging workforce; second is declining asset prices: The flat-lining of equity markets for ten years, combined with six years of declining home prices. Third, forecasts for the economy suggest any growth will be anemic. To take the economy first; the consumer, who represents 70% of GDP, is deleveraging. While manufacturing and exports may take up some of the slack, they will not be able to fully offset the effect of consumers redressing their balance sheets. Manufacturing needs greater visibility, with permanent not temporary measures taken regarding taxes and regulation. As long as the trade bills sit on the President’s desk, held captive by Richard Trumka and his unions, growth in exports will be impeded. Government spending will offset some of the decline – the path preferred by the Administration – but is restrained by the level of debt assumed in the past three years, and because of entitlement obligations made decades ago that are now coming due.

Jim Paulson of Wells Capital recently pointed out that household purchases between 1972 and 1996 grew at an annual rate of 3.2%. Between 1996 and the present, they grew at 2.8%. He projects that the rate of decline will persist, averaging between 2.0%-2.5%. Gus Faucher director of macroeconomics at Moody’s Analytics supports that notion. He argues that older people have lower incomes and consume less. Aging and slower economic growth are related.

Asset growth has not kept apace for the elderly. Christopher Herbert, director of research at Harvard’s Joint Center for Housing Studies was recently quoted in the Wall Street Journal: “Relative to the value of their homes, the amount of indebtedness if anything has gone up because house prices have fallen faster than mortgages have been reduced.” Equity markets have been flat for ten years, negatively impacting the savings and retirement accounts of baby boomers. (The S&P 500 is only 10.8% above where it was in the immediate aftermath of 9/11; it is 25.7% below where it was in March 2000.) The decline in home prices, begun six years ago is taking its toll on all, including the retired and near-retired. Last Wednesday, the Journal article quoted above, E.S. Browning quotes William Apgar of Harvard who had opined that for households with heads aged 62-85 the median mortgage debt in 2007 was “five times the 1987 inflation-adjusted median.” One consequence of this debt has been a reduction in contributions to retirement accounts. The same article quotes Fidelity Investments: “Participants aged 55-60 contributed a median 8% of salary in the first quarter of this year, down from 10% in the same quarter of 2006.”

The third element of this possible battle, is changing demographics. Like most of the world, the U.S. is aging. Americans over the age of 65 are the fastest growing segment of the population. According to the U.S. Census Bureau, 13% of Americans today (about 40 million) are over the age of 65, versus 10% in 1950; that number is expected to reach 19.3% (about 72 million) in twenty years. Those between the ages of 18-24, today represent 9.9% of the population. That percentage is expected to decline to 9.1% in twenty years. The percent of those between the ages of 25-44 is expected to decline modestly from 26.8% to 25.5%. A combination of declining birthrates and improvements in healthcare and healthier lifestyles are responsible for this change. This increase in the aging population is reflected in a recent study by Robert Lerman and Stefanie Schmidt of the Urban Institute. They explain that the population of 65-69 year-olds will grow by 37% in the next ten years. During that same time frame, the over 70 population will rise by 38%. (In contrast, the overall population is expected to grow about 12%.)

Most of today’s American jobs are in the service sector, requiring little physical exertion, a benefit for the elderly. On the other hand, technology has become far more ubiquitous, providing an edge to youth. Regardless, according to AARP, the unemployment numbers for those above the age of 55 is 6.5 percent, substantially below the national average of 9.1 percent. At the other end of the spectrum, unemployment among youth is the highest. The Bureau of Labor Statistics (BLS) puts unemployment for the age group 16-25 at 18.4 percent. Robert Lerman and Stefanie Schmidt of the Urban Institute, in a recent study, predict that over the next decade 50% of additional workers will come from the over 55 group, while only 20% will come from the youth labor force.

So we have an economic pie, which is growing more slowly being pursued by a workforce that is aging. And the elderly, the fastest growing segment, have seen their assets shrink. Mr. Lerman and Ms. Schmidt concluded that in 1996, 25-44 year olds represented 52.6% of the workforce. By 2006, that number had shrunk to 44.5% and continues to decline. At the same time, the age group 55-75+ had grown from 12% to 15.4%, and continues to increase.

This situation is not unique to the United States. “We’re concerned that if young people feel they are denied hope of jobs by older generations, there is the possibility of tension.” So was quoted Baroness Sally Greengross, a member of the British House of Lords who chairs the UK’s “Inter-generational futures all-party Parliamentary Group,” in the FT. Balancing her words, she added: “And similarly, that older people might be overlooked and considered incapable.”

The battle between youth and age has been going on for years in the political arena. Youth has been the winner in the last five Presidential elections (the longest such stretch in U.S. history,) with Barack Obama’s victory over John McCain in 2008 showing the largest age differential ever. Clinton was twenty years younger than Bush senior and twenty-three years younger than Bob Dole. Bush was two years older than his two opponents. On the other hand, during the ninety-two years between 1896 and 1988 the older candidate won 75% of the time.

An aging workforce pits experience against energy and adaptability. But companies may have little choice. Allan Hatten Yo, chief executive of Beth Johnson Foundation, an English organization that encourages companies to have younger and older workers learn from one another, is quoted in the FT article, “When you are trying to make sure a company survives you don’t necessarily have the time to invest in workforce development in the same way.”

A battle between youth and age may be developing. I am not sure. A sub-par economic recovery will accentuate trends. What we do know is that the work force is aging and that the world is in flux, giving an advantage to those people and businesses that are capable of adapting.

Thursday, September 8, 2011

"The Republican Debate - Let the Games Begin"

Sydney M. Williams

Thought of the Day
“The Republican Debate – Let the Games Begin”
September 8, 2011

Last night’s Republican debate is a reminder of the value of the democracy in which we live. Eight people were on the stage, all accomplished but with none of the accoutrements that accompany a President. Each one of whom could be someone we know. Yet one of them will likely receive the Republican nomination for President, and one could become the leader of the most powerful nation on earth. One thing is for certain; we will hear a lot more from them, as this debate was only one of about twenty over the next fourteen months.

To the extent that the moderators, Brian Williams (NBC’s anchor) and John Harris (Politico), hoped to get the participants to attack one another, they had to be somewhat disappointed. Early on, Newt Gingrich, in response to a pointed question, interjected: “We’re not interested in your effort to get Republicans fighting one another. We are all for defeating Barack Obama.” That does not mean that there were not barbs tossed about. The differences, for example, between job creation in Massachusetts under Mitt Romney versus Texas under Rick Perry were explored, leading to one of the better lines of the evening. “Texas,” Mr. Romney pointed out, “has no income tax and a Republican legislature and a lot of oil and gas in the ground.” For Mr. Perry to take credit for that, he said, would “be like Al Gore saying he invented the Internet.”

The field of eight will soon be whittled down. Candidates such as Newt Gingrich, Ron Paul, Herman Cain and Rick Santorum are unlikely to be in the field much longer. After all, it costs money to run for President, even in these early days when candidates carry their own bags. But each candidate plays a role. Newt Gingrich playing the “grand old man” kept reminding everyone that the foe was Mr. Obama, saying that anyone on this stage would do a better job. But his age, his general irreverence and his muddled personal life make it unlikely he will succeed.

The iconic Mr. Paul, always a delight to listen to, kept to his beliefs that federal mandates are a violation of our basic constitutional rights. While the world swirls around him, he keeps a steady hand on the rudder guiding his particular ship. His comment on the border was pure libertarian: “Fences with machine guns are not the answer. They may keep people out, but they may also keep people in.” Toward the end of the debate, he accused the moderators of misunderstanding the compassion of conservatives who believe in less argument. It is a difficult point to make for those brought up to believe that compassion is solely the responsibility of government.

Herman Cain is refreshing in the simplicity of his plan – nine, nine, nine. Nine percent corporate tax rate, nine percent personal tax rate and nine percent tax rate. As he said, “If ten percent is good enough for God, then nine percent should be good enough for the federal government.” Rick Santorum is the son of Italian immigrants and spoke impressively of the importance of immigration to our country.

While they all have their followers and strong points, it is difficult to imagine any one of them in the Oval Office. Mr. Gingrich is very bright, but something of a gadfly. Mr. Paul serves his country by keeping politicians honest. Mr. Cain, a successful entrepreneur, has ideas that the eventual candidate could incorporate, but in his simplistic solutions to complex problems he reminds one of Ross Perot in 1992. Mr. Santorum, in many respects a unifier, seems too nice a person to be President.

That leaves four – Mitt Romney, Rick Perry, Michelle Bachman and Jon Huntsman. Given his low poll numbers, most people would count Mr. Huntsman out. Perhaps he will fold, but I am not so sure. (At this point, let me admit my personal bias that Jon Huntsman would be the best candidate.) During the debate he emphasized the importance of picking a candidate that could appeal to independents, something that might be difficult for Ms. Bachman and Mr. Perry. For example when it came to discussing immigration, Mr. Huntsman invoked Ronald Reagan. (In fairness all the candidates made frequent reference to the “gipper.” After all they were in the Reagan Library and Nancy Reagan was in the front row.) Huntsman pointed out that Mr. Reagan saw immigration as a “human issue” and that we need to attract brain power. When it came time to take a “pledge” to introduce a balanced budget amendment, the sole holdout was Jon Huntsman. He said the only pledge he would take would be “a pledge not to take a pledge. A pledge diminishes discussion.” Mr. Perry, in contrast, said that a balanced budget is needed for the same reason one cuts off a snake’s head.

Given his front-runner status, Mr. Perry was the obvious target for both the moderators and the participants. In his book (which I have not read, nor do I intend to,) Fed Up, Mr. Perry apparently referred to Social Security as a Ponzi scheme, and “a lie to our kids.” While everyone knows that Social Security is unsustainable in its current form, Mr. Perry’s words provided Mr. Romney the opportunity to say that he would keep it, but fix it. The others chimed in. Mr. Perry’s executive order mandating the vaccination of twelve-year-old girls for a sexually transmitted virus (later overturned by the Legislature) was criticized as excessive use of executive power. When questioned about the fact that, as governor, he (Mr. Perry) had executed more prisoners than any other, he received applause from the audience, much to the disbelief of Brian Williams. Mr. Perry’s antipathy toward the science surrounding climate change was challenged. Mr. Huntsman retorted that “we cannot run from science.” Mr. Perry replied that we are putting the economy at risk because of a “science that is not settled.”

Ms. Bachman seemed less relevant with Mr. Perry in the race. Both are social conservatives. During the debate she seemed less strident. She argued that it was wrong to go into Libya, as “we had no interests.” She spoke of “family values” and “parental rights.”

Mr. Romney came across as the most aggressive of them all. He knows he is behind in the polls and must show he is more of a fighter. While his tenure as governor received some censure, he emphasized his role in the private sector. When Brian Williams accused him of buying companies, stripping them down, eliminating jobs and then reselling them, Mr. Romney fought back, expounding on the number of jobs his companies had created. My guess would be that Mr. Romney will be the principal beneficiary.

The main target of the debate was not one another; it was the incumbent. They all agreed on the economy’s need to increase the role of the private sector. They emphasized less regulation. They want to return Medicaid to the states. They all abhor the increasing dependency of people on government. Jon Huntsman said that while many issues are important, one is critical – jobs. “The President doesn’t have a clue,” said Mr. Romney. Mr. Perry reminded people of President Kennedy’s statement that the most powerful welfare program is a job. Mr. Bernanke, as chief of the Federal Reserve took some hits. Ron Paul pointed out that he could buy a gallon of gasoline “for a dime – a silver dime that is now worth $3.50, thanks to dollar depreciation.”

The games have begun.