Tuesday, January 31, 2012

“Banks and Government – Crony Capitalism at its Worst”

Sydney M. Williams
Thought of the Day
“Banks and Government – Crony Capitalism at its Worst”

January 31, 2012

The relationship between banks and government has become increasingly symbiotic…and not in a good way.

As the twentieth century began, banks were essentially unregulated entities, governed solely by the risk of insolvency. The ‘Panic of 1907’ resulted in the Federal Reserve Act six years later, a Bill that created a central bank charged with setting monetary policy and being the lender of last resort. In 1933, four years after the stock market crash of 1929, the passage of Glass-Steagall separated investment banks from commercial banks and created a system of federal insurance for depositors.

The Depository Institutions Deregulatory and Monetary Control Act was enacted in 1980. The Bill, a response to the rapid growth in money market funds, phased out Regulatory Q, which had prohibited banks from paying interest on demand deposits and had limited the amount paid on savings accounts. Money market funds competed with banks for deposits, assuming more risk while paying higher returns. Greed replaced caution on the part of savers. Nineteen years later, Glass-Steagall was essentially repealed. It was that repeal, more than anything else that created today’s banking behemoths, which are now “too big to fail.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 did nothing to stunt the continued growth of the nation’s biggest banks, or the risk that their size means for our nation’s capital markets. What it did do was create a Consumer Protection Board. Additionally, it requires banks to hold more capital and to use less leverage. It has implemented (or so they claim) an “advanced warning system”, a role previously played by bond vigilantes. And it is supposed to improve transparency and accountability for exotic, derivative instruments. Its success remains to be seen.

However, the ultimate consequence of almost every action taken by government has been to increase the risk to the system, as the threat of bankruptcy has lessened. Typically, interest rates in Treasuries have been governed by expected rates of inflation, as the risk of default has been considered nil. In contrast, corporate bonds have historically been priced according to perceived risks of bankruptcy. The Credit Default Swap (CDS) market and markets for credit insurance were established, so that investors could track risk and issuers could more easily and less expensively access credit markets. (Unfortunately, the CDS market has developed without regard to the size of the underlying issues, a problem left unaddressed by Dodd-Frank.)

Now, the Federal Reserve has indicated that Fed Funds – the raw material for banks – will remain at zero through early 2014. Fed Fund rates have been at this level since January 28, 2009. When the price of your raw material is zero, it encourages, over time, speculative activity, as we saw in home prices in the early 2000s and more recently in commodity prices. Five years of keeping them at this level distorts capital markets. The very rapid increase in central bank assets is something we have never seen. Assets of the eight largest central banks approximate $14.5 trillion, or about a third of their combined GDPs, versus a number closer to 10% three years ago. When the spigot is turned off, as it will be someday, no one knows the reaction. Can central bankers articulate an exit strategy without spooking the markets? No one knows.

The problems in Europe clearly portray the problem of socialism – of promising more than can be delivered. Yet the massive involvement of central banks in markets implies a de facto return to planned economies. Is it too late for capitalism? Certainly, the administration in Washington sees no other way than the continued process of increasing dependencies. Wall Street has been demonized by the Obama administration, Occupiers of Wall Street have been glorified by the media, and those like Professor Joseph Stiglitz have characterized the situation as the “privatizing of gains and the socializing of losses”, with no mention of the role played by government in creating the environment that led to the problem.

Government sees its role as protecting consumers. Naked capitalism can seem brutal; for it punishes as well as rewards. On the other hand, the effect of socialism, or statism if you will, is to reduce personal responsibility, making people less able to fend for themselves. While purporting to do good, it harms initiative and progress. It increases dependency and limits personal responsibility. It leads to crony capitalism and economic stagnation. Definitionally, socialism is based on a cynical view of mankind, as it assumes dishonor and disdain. Capitalism, in contrast, relies on market forces and assumes openness, honesty and respect. It functions under a system of laws to protect both borrower and lender. Most importantly, it makes possible entrepreneurship and maximizes human potential. As Rabbi Aryeh Spero wrote in yesterday’s Wall Street Journal, “Nations that throw over capitalism for socialism have made an immoral choice.”

It is not that I am against regulation. Glass-Steagall served a good purpose. It prevented the emergence of super banks, and its repeal has done damage. Crony capitalism, within the financial sector, is based on banks and financial institutions that are too big to fail. In terms of aiding and abetting the housing bubble, the worst examples by far were the two Government Sponsored Entities (GSEs), Fannie Mae and Freddie Mac. The country cannot afford bank failures that jeopardize our financial and credit system. Treasury Secretary Henry Paulson tested the system in September 2008 when he let Lehman fail. It worked, but barely. A Goldman failure would have brought the system down. Unfortunately that lesson has not been learned, as bankruptcy was removed as an option. Banks, appreciative of their position, do everything they can to keep their “crony friends” in office. And by far, the best “friends” of bankers in the years leading up to the credit meltdown were Representative Barney Frank and Senator Chris Dodd. Yet, the bill purportedly aimed at preventing such a future occurrence ironically bears their name!

The problems we face will not be answered until there is an honest accounting as to who and what were at fault for the credit collapse of 2008. Thus far, Washington has been in denial as to the role they played. Certainly, unscrupulous bankers took advantage of the circumstances that lay before them, but the opportunities were provided by Washington. Rules and regulations were (and have been) reactionary, not anticipatory. Some individual consumers were surely duped, but most voluntarily walked to the guillotine on their own, accepting an unknowable level of risk in return for unrealistic gains – ignoring the fact that home prices that were expected to rise indefinitely had already risen too far; and they borrowed more than they could afford.

Banks may symbolize the greed that brought the system down and have become a convenient scapegoat, but the real fault lies with Washington that encouraged the environment and remains unrepentant. Today it is the Fed. Money may be cheap at the moment, but the consequences are likely to be expensive.

Monday, January 30, 2012

“An Internet Ministry of Truth?”

Sydney M. Williams

Thought of the Day
“An Internet Ministry of Truth?”
January 30, 2012

Using Clinton-speak (a form of double speak unbecoming to a Rhodes Scholar), former President Bill Clinton recently proposed an Orwellian federally funded ‘Internet Ministry of Truth.’ “That is, it would be like, I don’t know, National Public Radio or something like that, except it would really be independent and they would not express opinions, and their mandate would be narrowly confined to identifying relevant factual errors,” the former President precisely and concisely explained.

It is worth recalling that Winston Smith’s responsibility in Oceania’s Ministry of Truth was to falsify historical events, so they would conform to subsequent events. Mr. Clinton’s recommendation would appear to be in conflict with the concept of relativism – a favorite idea of coastal elites – for implied in the recommendation is that the federal government could differentiate “factual errors.” Asked another way, can government answer the plaintive callings of Johnny Cash’s youth, “What is Truth?” Should we trust government to do what is right? The answer to the first is ‘no’; the answer to the second is ‘of course not.’

Government has already determined that when we are in the nation’s airports we must all watch CNN, a distinctly liberal-biased cable news station. Fox News, with three times the viewership of CNN, is considered ‘biased’, while CNN is deemed ‘balanced.’ That’s hogwash and most people realize it; they are both biased, only Fox is honestly so.

For thousands of years, the search for truth has been the purview of philosophers and theologians. Diogenes, four hundred years before the birth of Jesus, allegedly carried a lantern in search of an honest man. Moses gave us the Ten Commandments, filled with “thou shalt nots’,” but all commonsensical rules that are necessary for people living within a civilized society. Most of us abide by these moral certitudes. In the Book of John, Jesus proclaims: “I am the way, the truth and the life….” For such perceived heretical comments, Pontius Pilate sentenced him to death. Medievalists, in searching for the Holy Grail, were in reality seeking what they perceived to be truth. E.B. White ends his children’s novel, Stuart Little, with the eponymous mouse continuing his quest.

Relativism argues that all points of view are equally valid and that all truth is relative. I don’t buy that. Killing, except in the case of self defense is wrong, as are robbery, rape and a host of other violations of common decency. As James Q. Wilson wrote in A Moral Sense, “We are human, with all the frailties and inconsistencies that this implies, but we also wish …to avoid becoming less than human.” My sunny disposition would turn dyspeptic, should we assign responsibility for determining truth to politicians like Bill Clinton, a man uncertain as to the meaning of “is.”

The internet is an open forum, where opinions of all type – sane and insane – get equal and ubiquitous exposure. There is no question that it can be used as a vehicle for spreading false stories, for illegally using copyrighted material. It is unsurprising that those like Mr. Clinton see it as a challenge to orthodoxies he believes are inviolate. However, all aspects of the media have long been used to serve the purposes of those with strongly held opinions. One of the best examples has been the perceived threat of man-induced global warming. And, one of the most obvious beneficiaries of reporting questionable data as fundamental truths has been Mr. Clinton’s former Vice President, the irrepressible Al Gore. Utilizing marketing skills and taking advantage of the media’s influence, Mr. Gore (with an assist from the even more clever and less scrupulous Michael Moore) has been able to take a subject with questionable conclusions, man-induced climate change, and make millions of dollars for himself, while raising the costs for thousands of entrepreneurs who have had to adhere to unnecessary regulations. Hypocrisy, in the hands of the Left, knows no bounds, especially when there is a buck attached.

The benefits of the internet are legion, and we are not going back, but its intrusive behavior means there is no place to hide from marketers, politicians and pundits. No one, obviously, has the right to call out “Fire!” in a crowded theater, but most speech is (and should be) allowed. (Though it is curious that the Left has a harder time than the Right when it comes to permitting radical and revolutionary speakers on college campuses!) Our right to privacy, at times, seems in conflict with our rights to speak and write freely. While millions of us object to the incessant spread of spam e-mails, or even ones like mine that profess opinions, the First Amendment of the Constitution expressly prohibits the enactment of laws that abridge the freedom of speech or infringe on the freedom of the press. Mr. Clinton, it would appear, has suggested a fundamentally flawed proposition.

Admittedly, there are aspects to the internet not to our liking, such as protecting content providers against thievery, ergo the two fractious bills before Congress – SOPA (Stop Online Piracy Act) and PIPA (Protect I.P. Act.) As well, it has been suggested by some in Congress that China practices cyber thievery as a national policy. But it is the openness of the internet that is its greatest virtue.

The feral nature of the internet is not unlike a New England town meeting – the practice of democracy in its purest form. Everybody has a chance to speak, to make him or herself heard. While a strong first selectman can attempt to control the agenda, he or she must bow to the will of the people when there is vociferous dissent. In contrast, the “people’s pledge”, a (perhaps) well-intentioned attempt by Scott Brown (R) and Elizabeth Warren (D) in their Massachusetts Senate race to control campaign donations from super PACs and other independent groups, is in actuality anti-free speech – a far worse crime. As disgusting as is the gross amount of spending on political campaigns today, it is not as reprehensible as would be the curtailing of free speech. The search for truth and free speech are inextricably intertwined.

To deny anyone the right to air his or her opinion or support – whether in favor of a particular politician or against a specific policy – would appear to violate the intent of the First Amendment, and is morally equivalent to establishing George Orwell’s Ministry of Truth (or Bill Clinton’s Internet Ministry of Truth.) Sunshine, not government intervention, has always been the best disinfectant. Let the games continue.

Thursday, January 26, 2012

“The President’s Speech and the Gentleman from Indiana”

Sydney M. Williams

Thought of the Day
“The President’s Speech and the Gentleman from Indiana”
January 26, 2012

Listening to the President speak on Tuesday evening, I felt like Geppetto watching Pinocchio’s nose grow longer. I half expected to see Representative Joe Wilson leap from his seat at any moment. His eloquence from the pulpit above the House chamber is unparalleled. His voice soars and then dips to whispers. His was a masterful performance. Over eighty times during the sixty-five minute speech he was interrupted by applause.

As President, Mr. Obama is the most powerful man on earth. He spoke to an audience representing the world’s most powerful nation. It was a heady moment, and Mr. Obama played the role to the hilt. It mattered not that that he ignored the big sweeping issues that propelled him to the White House, and which have been the cause of most of our debt and which have exacerbated our economic downturn. Mr. Obama has divided the nation, demonized Wall Street, consistently blamed his predecessor for all of his troubles and has layered on more debt and bureaucracy in Washington than anyone before. Yet, he sounded like George W. Bush, but referenced the more popular Abraham Lincoln when he said: “From our nation’s first days, we have put our faith in free markets and free enterprise as the engine of America’s wealth and prosperity.” Mr. Obama’s mentor, Saul Alinsky, must have rolled in his grave until realizing he meant none of it. Watch what a man does, not what he says.

In contrast, Governor Mitch Daniels, providing the loyal opposition’s response, spoke before a lone camera to an empty room; so no applause. Nevertheless, his few words resonated with fundamental truths, giving truth to that opening line from John of Gaunt in Act II of Shakespeare’s Richard II: “When words are scarce they are seldom spent in vain.”

Mr. Daniels acknowledged that the President did not cause the economic or fiscal crisis, “but he was elected on a promise to fix them, and he cannot claim that the last three years have made things anything but worse; the percentage of Americans with a job is the lowest in decades.” “You cannot,” he added, “build a middle class on borrowed dollars and reckless spending.”

While recognizing that his own popularity is low, Mr. Obama realizes that the poll numbers for Congress are even lower. He placed blame on “obstructionist” Republicans, conveniently ignoring that for two of the last three years Democrats controlled both Houses, and still do the Senate. In calling for regulatory reform, he made no mention of the 149 $100 million plus major rules he has implemented, or of the costs of complying with Obamacare, or the $830 billion Stimulus that did not stimulate, or of Dodd-Frank, which failed to incorporate the Volcker Rule. There was no mention of “cash-for-clunkers.” He chose to ignore the $6 trillion in debt he has added, and the subsequent downgrade in our nation’s debt. There was no mention of card-check, a failed attempt to void the process of a secret ballot. In short, he smartly chose not to highlight his own record.
The speech’s focus was on “fairness”, always a safe subject; for who wants to be accused of being unfair? But if fairness involves getting the economy moving, putting people back to work, addressing the inequities built into the tax code, confronting run-a-way deficits and future unaffordable obligations related to entitlements, the President would have been wise to listen to the less charismatic, but far more sensible Governor Daniels. Alas, we know that will not happen.

There was no mention by the President of individual liberty and freedom, the basis of our country and our government. His is a vision that sees government as the answer; it ignores personal responsibility, and both the punishment and rewards that ensue. His “fairness” is one of outcomes, not opportunity. He wants to lower the costs of student loans, with no mention of eliminating or reducing the bureaucracies responsible for rising college costs; nor did he acknowledge that lower rates for borrowers imply lower returns to lenders – a problem that helped perpetuate the recent housing crisis. When government dictates lending practices and interest rates there are consequences. The President, wisely, would like to restore manufacturing to our shores, but failed to address the role unions, taxes and regulation played in our losing those manufacturing jobs in the first place. He highlighted the bi-partisan free trade agreements, though washed over the fact they sat unsigned on his desk for two years.

However, I do like his recommendation that community colleges become community re-employment centers, and I admire him for taking on the teacher’s unions, rewarding the best and replacing the worst. I agree with him about immigration reform, and his call for offering citizenship to college graduates mimics my own. On the other hand, I winced when he took credit for our growing oil and gas production, based on a technology that industry developed despite his policies. His call for clean energy, a laudable goal, never mentioned the cronyism that cost Americans half a billion dollars and hundreds of jobs at Solyndra, nor was there any mention of the ill-fated Keystone XL Pipeline.

All in all, it was a classic Barack Obama performance, with points awarded for form, but not for substance. There was no question it was more of a campaign speech than a statement on the union. Perhaps I am too cynical, but I find it hard to match his words of Tuesday night – “no bailouts, no handouts” – with his actions over the past three years.

Tuesday, January 24, 2012

“Keystone XL – Should Have Been an Answer to Jobs and Debt”

Sydney M. Williams

Thought of the Day
“Keystone XL – Should Have Been an Answer to Jobs and Debt”
January 24, 2012

“We will be able to look back and tell our children that this was the moment when we began to provide for the sick and good jobs for the jobless; this was the moment when the rise in the ocean began to slow and our plane began to heal.” So spoketh the audacious (and arrogant) Barack Obama on June 3rd, 2008, in St. Paul, Minnesota, after having defeated Hilary Clinton to become the Democratic nominee for President. If the sick are better off than they were, it is because of continued advances in medicine and healthcare. Certainly, little that is positive can be attributed to the Affordable Healthcare Act that very few fully understand and has yet to be fully implemented, or paid for. I am unsure if oceans are rising or falling, or whether our planet is better off than it was, but good jobs have not been provided for the jobless. And federal indebtedness is creating an albatross around the neck of all our citizens, especially the young.

The jobs situation has been an unmitigated disaster. According to data from the Bureau of Labor Statistics, by the end of 2011, there were just over six million fewer people on non-farm payrolls than there had been at the start of the recession. For the first time since demobilization following World War II, disposable per capita income has shrunk, and has been shrinking for the past five years. And in the past three years, the federal government has tacked on an additional $6 trillion in debt, or about $20 thousand for every man, woman and child. Are we better off today than four years ago?

The country faces two monumental problems – jobs and debt, too little of the former and too much of the latter. While the first is of immediate concern and the second is a long term problem, the solution to both emanates from the same source – economic growth. From what we read and hear, the President plans to address the issue this evening, but that begs the question as to why he let a small number of wealthy environmental lobbyists block his approving of the TransCanada Keystone XL Pipeline. The obvious reason is because they are financially important to Mr. Obama’s reelection efforts – a campaign expected to cost a billion dollars! It is important to keep in mind that environmental consciousness is a function of wealth. Environmentalists, for the most part, are wealthy individuals – part of the one percent!

Policy makers must balance the economic interests of all their citizens against the demands of a few environmentalists. Saving the planet is a laudable goal, but creating jobs, at the moment, is more imperative. It is natural to want to live in the most pristine environment affordable, with the emphasis on affordable. I am both beneficiary and witness to those tendencies, living as I do within the estuary of the Connecticut River.

The XL Pipeline seemed to pass muster with most of these people. A Congressionally passed rider to the December 23 Payroll Tax Bill was designed to give the President a way out of the box he was in – placed between those who need jobs and those who, in the interests of environmentalism, would prevent them. That rider concluded that “no further Federal environmental review [regarding the Keystone XL Pipeline] shall be required.” Common estimates suggest that the $7 billion project would have created 20,000 direct construction jobs, and more than 100,000 indirect jobs along the almost 2000 mile route. With 8.5% unemployment and with Iran threatening the Straits of Hormuz, the decision seemed obvious. The President, however, deemed the pipeline not in our national interest and that, despite the message from Congress, more studies need be made. Presumably he must consider the only thing in our national interest is his re-election. Certain basic principals inherent to our political system are worth remembering at a time like this, as our leaders seem too often to forget them. The most basic tenet is that government workers are paid from taxes collected on those working in the private sector. Public sector workers are for the most part bureaucrats. They do not generate economic value. They consume the private sector’s dollars. They work for the people, and need to be reminded of that fact regularly. A second tenet is that Congress, not the President, enacts laws.

Ironically and with no thanks to the Administration, U.S. oil production has surged over the past three years. Horizontal drilling and hydraulic fracturing that have driven the natural gas industry over the past few years are technologies that are being used for the production of oil in regions such as the Bakken shale area in North Dakota. As a result, oil production has risen 17% to just under 9 million barrels per day. Nevertheless, approval of the pipeline would have created jobs and decreased oil dependency from unfriendly places like Venezuela and the Middle East.

Our country needs pro-growth economic policies. Higher nominal income tax rates are not the answer. The complexity of the code has become the briar patch for those like Jeff Immelt of GE and Warren Buffett, as it favors the very rich and crony capitalists who are in bed with their buddies in Washington. These people and companies don’t care what the nominal tax rate is. Their lawyers are paid to find ways of skirting its provisions and to lobby for specific deductions and credits. Simplifying the code, making it broader and flatter for both individuals and corporations, may cost thousands of lawyers and accountants their jobs, but that act would do more to stimulate economic growth than any government led investment, such as solar panels or wind farms. In the meantime, the President has cynically decided that money from his “green” friends has a higher priority than thousands of jobs for those in the nation’s mid-region.

Tonight the President will address the nation. His words will be eloquent and will surely resonate with the Left, as they have over the past four years. A year ago his three big projects were high speed rail, high speed internet access for all Americans and green jobs (think Solyndra), all of which proved to be more hype than reality. Obsequious sycophants like the three major networks, the New York Times, Newsweek, CNN, MSNBC and the Washington Post will fawn over his words. However, those of us who have grown skeptical of this man will want to see what he does, not what he says. Cynicism begets cynicism, as the decision in the case of the Keystone XL Pipeline makes obvious.

Friday, January 20, 2012

“Civil Misbehavior”

Sydney M. Williams

Thought of the Day
“Civil Misbehavior”
January 20, 2012

There have been few events that so magnificently illustrate the decline in Western mores over the past one hundred years than the contrast between the behavior of Captain Francesco Schettino of the Costa Concordia this week with that of Captain Edward Smith of the Titanic one hundred years ago.

At 11:30PM on April 15, 1912, four days out of Southampton, England, the RMS Titanic struck an iceberg. Less than three hours later, she disappeared beneath the cold seas of the Atlantic. Within minutes of hitting the iceberg, Captain Smith recognized that the “unsinkable” ship was doomed. He told his officers of the necessity for calmness, so that the evacuation process could proceed orderly. “Women and children first” was the command, and was largely obeyed. Unfortunately, the lifeboat capacity was too small for the number of passengers and crew. Of 2,223 people on board, 1,518 drowned, including the sixty-two year old captain.

In contrast, the scene aboard the Costa Concordia has been described as one of bedlam and panic, with commands being barked in two or three languages, but not in English. Allegedly, Captain Francesco Schettino abandoned his post, either deliberately or, as he claims, because he fell into a lifeboat. Either way, he was discovered on a lifeboat while most of his passengers were still aboard, struggling in the dark. A recording of a conversation between Captain Gregorio De Falco of the coast guard and Captain Schettino (“Chicken of the Sea”, as the New York Post ignominiously called him) is distinctly damaging to the latter – De Falco ordering the captain to return to his post; Schettino whining that it was too dark and too dangerous. The cruise liner struck a rock when Schettino maneuvered the ship with 3,206 passengers and about 1000 crew members aboard, too close to Giglio Island, the second largest island within the Tuscan Archipelago. The island is located between the Ligurian and Tyrrhenian Seas, a few miles from Livorno, on Italy’s northwestern coast.

The two events are evocative of the marked change wrought by the passage of one hundred years. Civilization is fragile. Victor Hanson Davis writes in the current issue of “National Review Online” that the continuation of a civil life “requires respect for the law…individual self-reliance and common codes of behavior and civility.” Manners came naturally to people raised in that earlier time. Fifty years ago, I introduced my then twenty-three year-old girlfriend (now my wife) to my eighty-nine year-old grandfather; he stood when she entered the room. Today, such a response would seem quaint and forced. Small gestures, such as removing one’s hat when entering another’s home, opening doors, pulling out chairs, listening when another is speaking, saying please and thank you, are acts of civility, but more importantly they show respect.

Of course, there is much of that old world that is better gone. Society was far more structured, as the popular British TV series, “Downton Abbey”, so clearly portrays. The “One Percent” was a far more exclusive club than it is today. It was a world in which the young lived as had their grandparents, whether rich or poor, and the expectation was that the process would persist through ensuing generations. In Europe, royal and aristocratic families reigned, as they had for centuries, amassing wealth and enforcing laws to protect it. World War I and then World War II brought an end to that way of life. In the United States, white, Anglo Saxon families dominated business, finance and government. Immigrants were largely ostracized (as are many Mexican immigrants today) and the plight of African Americans was deplorable. Women were treated as second class citizens, not considered capable of exercising a right to vote.

We have come a long way and life is fairer than it was, but we have lost something in the process. There was a code that governed one’s conduct, a code that was embedded from a young age in those of my parent’s and grandparent’s generation. P.G. Wodehouse captured that spirit in the title of one of his greatest novels, The Code of the Woosters. In his recent novel, Rules of Civility, Amor Towles captures the last death throes of that world in 1938 New York. (Interestingly, the title comes from George Washington, as a teenager, famously transcribing ‘Rules of Civility & Decent Behavior In Company and Conversation’) While acknowledging that there are many who feel that man has lost his moral balance, James Q. Wilson argues that most people have a moral sense, but some of us have chosen to ignore it. “It is,” he writes in the preface to his 1993 classic, The Moral Sense, “as if a person born to appreciate a golden sunset or lovely song had persuaded himself and others that a greasy smear or a clanging gong ought to be enjoyed as much as true beauty.” However, further on he admits that “we may have promoted self-indulgence when we thought we were only endorsing freedom.”

We live in a world where twittering has replaced conversation; where friendship is measured in the number of hits on one’s Facebook page, rather than in the depth of a true relationship; where selfishness is given higher priority than selflessness; where knowledge, which was once stored in volumes, is now measured and stored in gigabytes, petabytes or even in zettabytes. But technology has not necessarily improved all aspects of our lives. The revolution in communication, software and game theory has not improved traffic flows, nor lowered the cost of healthcare, nor has it made our public schools better. Is an airline traveler’s experience at JFK better today than forty years ago at Idlewild? I don’t think so.

If one looks at a photograph of Edward Smith today, it is inconceivable to imagine him either falling or climbing into a lifeboat while hundreds of his passengers remained onboard. It would not have happened. The ship of which he was captain struck an iceberg with the nearest relief vessel more than several hours away. Honor, duty and respect governed his response, which was to save as many women and children as possible, knowing that he and most of the men aboard would perish. It was an attitude that deserves emulation, especially in this day of “me.”

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My wife and I will be in Florida next week where tennis, which for me can never replace skiing ; will be my daily activity; so my TOTD’s will be more sporadic, as they have been this week, with Monday’s Holiday and Tuesday’s evening in Boston.

Thursday, January 19, 2012

“Ashamed of Capitalism?”

Sydney M. Williams

Thought of the Day
“Ashamed of Capitalism?”
January 19, 2012

Free capital markets and individual freedom represent the foundation on which our nation was built. The two are interdependent and are integral to our success. One is not possible without the other. Yet, we have become apologists. Perhaps it was the recent credit collapse, and the persistent demonization of Wall Street, or maybe it is mainstream media’s love affair with the “Occupiers”, but this sense that capitalism is somehow bad has become ubiquitous.

Such an attitude is understandable in a President who grew up in academia, among community organizers, and in government. It is unsurprising that his policies are so at odds with capitalism’s basic precepts: competition, individual success and/or failure, personal responsibility, and price discovery through markets. From the Affordable Care Act, through Dodd-Frank, the bailout of GM which appeared to circumvent contract law by sacrificing bondholders in favor of union members, to stuffing the NLRB with those who would combat Right-to-Work laws in South Carolina and a refusing to grant the Keystone XL Pipeline a permit, the President has done his best to belittle the very forces of capitalism that permitted his ascendancy.

Less understandable are the attacks on Mitt Romney, a founder and former principal of Bain Capital, by his compatriots in the Republican Party. Perhaps this is all part of a plan, to inure Mr. Romney against the opprobrious assault that will surely be his in the general election (assuming he wins the nomination) when he will face President Obama. More likely it is a deliberate attempt to derail Mr. Romney, because his social conservative credentials appear wanting.

He has been called a “vulture capitalist” by Texas Governor, Rick Perry, and it was suggested that he must “enjoy” firing people by the sarcastic Newt Gingrich. Such talk implies a basic misunderstanding of private equity and free capital markets. Mr. Gingrich’s Super PAC produced “King of Bain”, trashing Romney; the film was more worthy of the vituperative, propagandist Michael Moore than a former Speaker of the House. An equity investment represents ownership, and a “private” equity investment is one that cannot be sold on public markets. It is risky. In the case of liquidation, an equity investor is last in line, behind creditors, suppliers, employees and the IRS. However, if the investment does well, the equity holder stands to be the largest beneficiary. A basic tenet of capitalism is the risk of loss, and equity investors, definitionally, are the biggest risk takers of all. Nothing is assured in investing, even U.S. Treasuries. Should interest rates rise, an investor’s principal will decline. Private equity investors search out either poorly managed businesses that could use their expertise and their capital in order to survive, or they may seek out entrepreneurs who need capital and financial advice to help finance an idea or concept. Over the fifteen years that Mr. Romney was at Bain, the firm did well and so did he. In the twenty-seven years since its founding, capital invested at Bain has risen from $37 million to $66 billion, indicating that the majority of their investments have done well. That success means that most of the businesses in which they have invested have done well, as we know from their early investment in Staples, and in Steel Dynamics, as was noted in a recent front page article in Investor’s Business Daily.

Interestingly, David Brooks, in his regular column in yesterday’s New York Times, noted that South Carolinians were smarter than Perry or Gingrich. Mr. Brooks wrote that he asked dozens of people as to whether he [Romney] was a “vulture” while at Bain: “Almost everybody thought the charges were ridiculous, even supporters of Newt Gingrich.” Mr. Romney would be wise to talk of the role Bain played in helping to restore America’s corporate sector in the 1980s and ‘90s. As Daniel Henninger writes in today’s Wall Street Journal, “This was a historic and necessary cleansing of the Augean stables of the American economy.” In similar vein, Daniel Luskin, in an op-ed in Tuesday’s Journal (an article that should be read by everyone), argued that Mr. Romney should use this moment to make the moral case for capitalism, as “it is the only economic system consistent with liberty.”

Capitalism has been questioned in the past and will surely be debated in the future. During the 1960s there were many who believed that the economic central planning of countries like the Soviet Union threatened the economic hegemony of the West. The collapse of the Soviet Union two decades later exposed the dictatorship for what it was – a state economy run for the benefit of a few, on the backs of the people who were kept in ignorance and in unbelievable poverty. John Kay, writing in Wednesday’s Financial Times, made the point clearly: “But what of profit? North Korea is hardly free of the profit motive. The Kim dynasty and the cliques around it may profess disdain for capitalism, but they understand the goal of personal enrichment as well as any Wall Street Master of the Universe.” In Hungary, Viktor Orban’s replacement of the Constitution with his newly minted “Basic Law” will assuredly condemn the citizens of that fledging Democracy to persistent poverty, while enriching himself and his minions.

Much has been written and spoken about the “jobless” recovery we are now experiencing. Capitalism is dynamic. It can be messy and, while Democracy demands equality of opportunity, there is no guarantee of equality in terms of outcomes. In every endeavor there are winners and losers. Just ask those, like Mr. Obama, who have competed for the Presidency.

No student of history can be, and no American should be, embarrassed by our system of free market capitalism. Universities, museums, the symphony and ballet are all beneficiaries of the generosity of men and women who have made fortunes because of our system of free enterprise. Those who question Mr. Obama’s attempt to wrest control of markets are not “dumb.” His opponents are simply advocating for a system that has worked well over many decades.

While some regulation is necessary, competition is the most efficient way to bring efficiency to the market place, especially in terms of pricing and in terms of offering consumers products and services they want and need (think healthcare!). In August 1971, Nixon’s attempt to let government impose pricing and controls proved disastrous and led to the devastating inflation later that decade. There is no reason to believe that Mr. Obama can do any better. Capitalism is intricately intertwined with the concept of individual freedom, which was the cornerstone on which our founders built this nation. It relies on only necessary regulation, and a broader, flatter tax with fewer deductions and credits. It has worked extraordinarily well for over two hundred years. Is it the perfect system? Perhaps not, but like Churchill’s comment about Democracy, it is the best and fairest economic system man has yet devised. No apologies needed.

Tuesday, January 17, 2012

“Central Bank Balance Sheet Expansion – A Palliative or a Serotonin?”

Sydney M. Williams

Thought of the Day
“Central Bank Balance Sheet Expansion – A Palliative or a Serotonin?”
January 17, 2012

I am far from an expert on the Federal Reserve, but I, like everyone, recognize unusual changes when I see them. And the expansion of the Fed’s balance sheet and, in fact, the Bank of England’s (BOE) and the European Central Bank’s (ECB) over the past three and a half years have been nothing short of extraordinary. It was unsurprising, therefore, that on Friday S & P downgraded France, Austria and seven other European countries. It remains to be seen whether these countries will be as cavalier toward the rating change as was the United States when the same rating agency downgraded our bonds last August.

The reason generally given for the rapid expansion of central banks’ balance sheets was the severity of the global recession and a desire to avoid deflation.

Speculation in stocks had driven valuations to unprecedented highs, in terms of multiples, by early 2000; when prices corrected in 2000-2003 that speculative fever was redirected to home prices. When that game ended, the sharp price declines in both stocks and housing fostered pessimism and a recession. American’s normal optimistic outlook has not yet returned. Millions of people have recognized they were living too much in the present, and were not planning adequately for the future.

Explanations for such speculative behavior on the part of individuals are myriad, but include government policies that encouraged such practices – easy credit and a low cost of borrowing, few incentives to save and an expectation by those working for government and within unions that their financial future was secure. Promises made were considered promises to be honored. But explanations for this profligacy go back further: the proliferation of credit cards in the 1960s and the Community Reinvestment Act of 1977 served to encourage consumption at the expense of investment. Robert Shiller, in Sunday’s New York Times, discussed a new book, Beyond Our Means: Why America Spends While the World Saves. Professor Shiller pointed out that Americans have long exhibited optimism for the future, producing an attitude, combined with government policies that helped breed a measure of personal irresponsibility.

The rise in stock, bond and home prices in the 1990s and early 2000s caused people to become self-indulgent and reckless as regards to borrowing. The image of a pot of gold at the end the rainbow became manifest in the housing industry with prices ever soaring and buyers regularly bidding through the offer price. The New York Times, in a front page article on Saturday, January 14 pointed out that members of the Fed, in their laudatory compliments to outgoing Chairman Alan Greenspan in 2006, appeared not to understand what was happening. Binyamin Applebaum, the author of the article, wrote: “The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.” It wasn’t just housing, consumption, as a percent of GDP had grown from 61%, in the mid 1950s, to 70% by the mid 2000s.

The last decade’s decline in the consumer’s asset prices – his home and his stockholdings – has impacted his attitudes. At the same time, an aging workforce and growing concerns as to the viability of Social Security and the virtual elimination of defined benefit programs are working their way through the American psyche. When the house of cards began to collapse, the Fed had no choice but to step in.

The consequence for consumers is likely to be a greater focus on savings and a reduced emphasis on consumption. Household and mortgage debt has been modestly reduced. Concomitantly, leverage at financial institutions was mandated to be lowered. The Federal Reserve stepped into the breach to stem what might otherwise have been a perfect storm. Over the past four years, the Fed’s balance sheet has increased three-fold. Similar increases can be seen in the balance sheets of the European Central Bank and the Bank of England. Jonathon Trugman, writing in the New York Post, notes: “In reality, though, the Federal Reserve has just extended essentially unlimited lines of credit, camouflaged as a swap, to the world in U.S. dollars.”

While most people agreed with the Fed’s aggressive actions in 2008 as necessary, the risks of continued monetary expansion are manifold. Inflation is an obvious risk. But there are others. Purchases of longer-dated assets utilizing short term borrowings risk all central banks becoming vulnerable to a rise in interest rates – reducing the value of its assets, while its liabilities remain intact. A Large and on-going purchase of assets by central banks distorts free-flowing capital markets. There is the risk of a cross-border feedback loop. Emerging countries – think China – have increasingly been the buyer of our Treasuries. Interest rates in Europe and the U.S. are no longer a function of normal supply and demand; thus the spread between yields in the developed world and the rest of the world may widen further, raising interest costs for emerging economies, especially those on which our exporters are increasingly dependent.

Actions have consequences. What was palliative in 2008 could become a serotonin in 2012. While I don’t pretend to know the answers, it seems obvious that central banks should begin easing back on monetary expansion, and that fiscal and monetary policy should be directed toward economic growth – less regulation, with a flatter, lower and broader tax system. We need to emphasize exports; to do so requires a healthy global economy, more liberal immigration policies at home, and an education system that is fearless of competition. At the same time, government must recognize the necessity for an aging population to increase savings and investments.

Credit expansion is the easy way out. Professor Joseph Stiglitz of Columbia recently wrote that austerity is not the answer. It “will only exacerbate the economic slowdown.” Nevertheless, the excesses baked into our system must be addressed. The answers will involve some pain; so the focus must be on growth. Despite misgivings of those like Professor Stiglitz, the private sector, time and again, has proven to be the only antidote.

Thursday, January 12, 2012

“A Lesson from Life”

Sydney M. Williams

Thought of the Day
“A Lesson from Life”
January 12, 2012
“Life is what you make it. Always has been, always will be.”
                                                                                                               Eleanor Roosevelt (1884-1962)

There are two types of situations that confront us: the first are those where we help to, or actually determine outcomes, and second are those over which we have no control. Most of our time is spent weighing options where we determine choices – food, clothing, shelter, education, friends, and political options. On the other hand, there are events over which we have little or no control, such as the economy, the stock market and the weather. Vail, with its below normal snowfall and from which I just returned, was an example of the latter.

While it seems that are our individual vote rarely counts, it is important to remember that only if one does vote does one have a say. The political options we face are stark in their contrast. One path leads to greater government involvement and control, lessening our economic freedom, as was made clear in the just published Heritage Foundation’s 2012 Index of Economic Freedom and highlighted by Edwin Feulner, the president of the Heritage Foundation, in today’s Wall Street Journal. The risks to our economy from this course are multifold. First, paying for the entitlements the Obama administration wants to offer will divert income from more productive purposes, ergo the Fed keeping interest rates abnormally low. Second, the more dependent people become on a benevolent government the less independent they become as individuals. And, third, people should never forget the message embedded in the title of Friedrich Hayek’s immortal classic, The Road to Serfdom. Individual liberty implies personal responsibility, which may be painful at times, but nevertheless is a necessary component of freedom.

Mr. Romney, assuming he becomes the republican nominee, offers a vision less grandiose, but more realistic and more in keeping with our historical legacies. He views government, as President Kennedy stated in his Inaugural, not as a vehicle for providing benefits, but as a means to protect us from those who would do us harm, as well as to ensure our individual rights. Government should provide equality of opportunity, not equality of outcomes.

On the other hand, there are lessons to be learned from experiencing events over which we have no control, like the weather, as I mentioned above, this past week in Vail. A year ago the mountain experienced its best conditions, perhaps ever – with 511 inches (42.6 feet) having fallen between mid November and April 23rd. In contrast, 95 inches (less than 8 feet) have fallen so far this year. Last year, all of the back bowls and Blue Sky Basin were open, as was one of my favorites Blue Ox, on the front, and we skied on fresh powder almost daily. This year we were limited to the front of the mountain, with the steeper trails closed.

However, we adapted. The challenges we faced were ones of watching out for loose pebbles on trails that became icy, rather than ones of sweeping down a back bowl with powder reaching one’s waist. The conditions were reminiscent of those I knew growing up in New Hampshire, packed powder with patches of ice. We swapped the excitement of racing through the trees on Blue Sky Basin for cruising Born Free. Skiing is an individual sport, but it is also communal, in the sense of a shared experience. Back in the lift line we swapped stories of near misses; we laughed at old and dumb jokes, as a way of releasing tension. It is difficult to describe the sense of traveling downhill on a pair of narrow boards at twenty-five or thirty miles an hour, with constantly changing conditions underfoot, but it is exciting and tense, no matter the trail or conditions.

There is much in our lives that we can affect and we should take care to do so, but there are instances and events beyond our control. Mrs. Roosevelt was correct in noting that life is what you make of it. The conditions in Vail were what they were. There was nothing we could do, and complaining wouldn’t help. So we skied hard, ate good food and drank better wines. We had a good time.

Monday, January 9, 2012

“A Plethora of Information, a Paucity of Wisdom?”

Sydney M. Williams

Thought of the Day
“A Plethora of Information, a Paucity of Wisdom?”
January 9, 2012

When I was growing up in the mid part of the Twentieth Century, it was generally assumed that the level of information doubled every ten years. In 2004, the American Society of Training and Documentation (ASTD) estimated that, with the advent of the Web, information was doubling every eighteen months. Two years ago, IBM predicted that by 2012 information would be doubling every eleven hours.

In 1988, Russell Ackoff, a former professor of management science at Wharton, described the process of data to wisdom as a pyramid, with data on the bottom, above which would be information followed by knowledge and at the top, wisdom. While data and information have grown exponentially, and knowledge has perhaps grown in a linear fashion, wisdom, if anything, appears to have retreated.

Radicati Group, an organization that collects data and provides research on messaging and collaboration, estimates that in 2010 two hundred and ninety-four billion e-mails were sent out daily, more than forty e-mails every day for every man, woman and child on the planet. They are about eight hundred million active members of Facebook. An estimated two hundred and fifty million people tweet four hundred and sixty thousand messages every day. As of a year ago, Wikipedia estimated that there were a hundred and fifty-six million public blogs on the internet. Information is readily available on virtually any subject, some of which we search for and other that shows up unsolicited in our in-boxes.

While we have greater access to more information than ever before, the responsibility for determining the accuracy of the information is ours. Judgment is not necessarily an adjunct of information. Politicians have taken steps to use social media to connect with citizens. President Obama has an estimated nineteen million “friends” on Facebook. He is the first President to regularly use Twitter to communicate with millions of people. Such activity raises the specter of an omniscient and omnipotent Big Brother. The ability of elected officials to stay connected has never been greater, and that will have consequences. It used to be said about political candidates that we don’t know enough about them. In some prominent cases, that still seems to be true, not because the information is not out there, but because someone has worked to cover it up. Nevertheless, over the past several months the trivial information we have learned about Republican candidates for President risks drowning out the more important information needed to make sound judgments. When a bombardment of data from those campaigning for re-election, solicited or unsolicited, true or false, takes precedence over the perpetuation of the Republic that suggests we have approached a dangerous situation.

The question of information overload is the subject of a recent book, Too Big to Know, by David Weinberger, a senior researcher at Harvard’s Berkman Center for Internet and Society. Professor Weinberger believes we have entered a new “golden age” in which technology has finally caught up with human’s endless curiosity. Can the brain, though, handle the reams of data? Professor Clay Shirky of NYU has said, “There is no such thing as information overload – only filter failure.” Perhaps? Digital filters don’t remove anything, they simply reduce the number of clicks to get something. The information still resides somewhere in the system, on a remote server or on a cloud. The digitization of information raises the question of control. Who becomes the gatekeeper? Will government restrict or limit access? Will people become robotic and less contemplative?

Futurist Ray Kurzweil addresses some of these questions in his recent book, The Singularity is Near, and concludes optimistically. The singularity representing the border we will cross when our species breaks the shackles of genetic legacy and we achieve far greater longevity. He writes of the union of man and machine, in which the knowledge and skills embedded in our brains will combine with the greater capacity, speed and sharing ability of the machines that man has created, enabling people to transcend biological limitations and to amplify their creativity. In essence, he believes that technological development will allow us to greatly extend our lives. Kurzweil, who is both a cosmologist and hypochondriac (according to Gary Wolf of “Wired Magazine”, he takes 180 to 210 vitamin and mineral supplements a day) believes that artificial intelligence will render biological humans obsolete, but will not make human consciousness irrelevant.

We live in an exciting and dynamic time. The amount of information will continue to grow exponentially, but that does not assure that wisdom will keep up. Staying “connected” has distinct advantages. But there are risks to this inevitable change. The desire for power is inherent in some. It is possible that bad men and women may use the vastly increased connectedness to manipulate the people. Man’s most distinctive and non-replicable feature is an ability to make judgments – to show wisdom based on a moral sense. That must not change.

"A Plethora of Information, a Paucity lf Wisdom"

Sydney M. Williams

Thought of the Day
“A Plethora of Information, a Paucity of Wisdom?”
January 9, 2012

When I was growing up in the mid part of the Twentieth Century, it was generally assumed that the level of information doubled every ten years. In 2004, the American Society of Training and Documentation (ASTD) estimated that, with the advent of the Web, information was doubling every eighteen months. Two years ago, IBM predicted that by 2012 information would be doubling every eleven hours.

In 1988, Russell Ackoff, a former professor of management science at Wharton, described the process of data to wisdom as a pyramid, with data on the bottom, above which would be information followed by knowledge and at the top, wisdom. While data and information have grown exponentially, and knowledge has perhaps grown in a linear fashion, wisdom, if anything, appears to have retreated.

Radicati Group, an organization that collects data and provides research on messaging and collaboration, estimates that in 2010 two hundred and ninety-four billion e-mails were sent out daily, more than forty e-mails every day for every man, woman and child on the planet. They are about eight hundred million active members of Facebook. An estimated two hundred and fifty million people tweet four hundred and sixty thousand messages every day. As of a year ago, Wikipedia estimated that there were a hundred and fifty-six million public blogs on the internet. Information is readily available on virtually any subject, some of which we search for and other that shows up unsolicited in our in-boxes.

While we have greater access to more information than ever before, the responsibility for determining the accuracy of the information is ours. Judgment is not necessarily an adjunct of information. Politicians have taken steps to use social media to connect with citizens. President Obama has an estimated nineteen million “friends” on Facebook. He is the first President to regularly use Twitter to communicate with millions of people. Such activity raises the specter of an omniscient and omnipotent Big Brother. The ability of elected officials to stay connected has never been greater, and that will have consequences. It used to be said about political candidates that we don’t know enough about them. In some prominent cases, that still seems to be true, not because the information is not out there, but because someone has worked to cover it up. Nevertheless, over the past several months the trivial information we have learned about Republican candidates for President risks drowning out the more important information needed to make sound judgments. When a bombardment of data from those campaigning for re-election, solicited or unsolicited, true or false, takes precedence over the perpetuation of the Republic that suggests we have approached a dangerous situation.

The question of information overload is the subject of a recent book , Too Big to Know, by David Weinberger, a senior researcher at Harvard’s Berkman Center for Internet and Society. Professor Weinberger believes we have entered a new “golden age” in which technology has finally caught up with human’s endless curiosity. Can the brain, though, handle the reams of data? Professor Clay Shirky of NYU has said, “There is no such thing as information overload – only filter failure.” Perhaps? Digital filters don’t remove anything, they simply reduce the number of clicks to get something. The information still resides somewhere in the system, on a remote server or on a cloud. The digitization of information raises the question of control. Who becomes the gatekeeper? Will government restrict or limit access? Will people become robotic and less contemplative?

Futurist Ray Kurzweil addresses some of these questions in his recent book, The Singularity is Near, and concludes optimistically. The singularity representing the border we will cross when our species breaks the shackles of genetic legacy and we achieve far greater longevity. He writes of the union of man and machine, in which the knowledge and skills embedded in our brains will combine with the greater capacity, speed and sharing ability of the machines that man has created, enabling people to transcend biological limitations and to amplify their creativity. In essence, he believes that technological development will allow us to greatly extend our lives. Kurzweil, who is both a cosmologist and hypochondriac (according to Gary Wolf of “Wired Magazine”, he takes 180 to 210 vitamin and mineral supplements a day) believes that artificial intelligence will render biological humans obsolete, but will not make human consciousness irrelevant.

We live in an exciting and dynamic time. The amount of information will continue to grow exponentially, but that does not assure that wisdom will keep up. Staying “connected” has distinct advantages. But there are risks to this inevitable change. The desire for power is inherent in some. It is possible that bad men and women may use the vastly increased connectedness to manipulate the people. Man’s most distinctive and non-replicable feature is an ability to make judgments – to show wisdom based on a moral sense. That must not change.

Saturday, January 7, 2012

"Iowa"

Sydney M. Williams
Thought of the Day
Iowa
January 6, 2012

In 2008, it is estimated that $51,593,849 was spent by the two parties, antecedent to the Iowa Caucuses. In the past several months even more money was spent. The Iowa caucuses ultimately result in selecting less than one percent of delegates that attend the two national conventions. This suggests about a million dollars per delegate! The price of admission to our political system keeps rising. The months leading up to the caucuses provide Iowans and, in the process, all Americans ample opportunity to evaluate the candidates, but the overexposure makes the candidates seem increasingly ridiculous, and exhausts the viewers and reporters – never have so many been so eager to leave Iowa behind.

Since 1972, the Iowa Caucuses have been recognized as the first step in the U.S. presidential nominating process, but their record in selecting the actual candidates is mixed. Both George W. Bush and Barack Obama won their respective Iowa caucuses in 2000 and 2008, but Ronald Reagan did not in 1980, nor did Bill Clinton in 1992. In 1988, George H.W. Bush was unopposed, as were sitting Presidents in 1984, 1996 and 2004.

The best thing about the Caucuses is that they are over and that the winnowing process has begun. Michelle Bachman is gone. Rick Perry is as well, though apparently he hasn’t received the message. Jon Huntsman and Newt Gingrich each have one more shot – Huntsman in New Hampshire and Gingrich in South Carolina. In an effluence of delusional obfuscation, depending on the pundit, the Caucuses were won by Mitt Romney, Rick Santorum and Ron Paul. If Romney wins both New Hampshire and South Carolina, he should be assured the nomination and Republicans can then devote whatever remaining ammunition they have against the real target – Barack Obama and his extremist views, which are leading the country toward a European form of Socialism. Mr. Obama will, no doubt, play the role of defending the ninety-nine percent against the one percent. The job of Republicans will be to make clear that people understand that Mr. Obama represents the one percent – an increasingly powerful, centralized federal government more interested in consolidating power than in the welfare of the people.

In my opinion, only one Republican candidate can defeat Mr. Obama and that is Mitt Romney. He may seem unexciting, but he is capable; his opinions are less strident than others (he is often accused of flip-flopping,) but he is a centrist; he may come across as a technocrat, but that is one of his strengths; he doesn’t wind up the electorate, but he is pragmatic. Republicans who are looking for a 21st Century version of Ronald Reagan to come riding out of the west will be disappointed. But the country has tired of extremists – both on the left and the right. Polarization has rendered Washington immobile. The time is right for someone with balance, not to lead us back to the olden days, but to lead us forward toward today’s challenges, while maintaining the capitalist system that has made us strong and the inherent goodness of our democracy that has made our country a beacon for the world.

 Iowa began the process, now it’s on to New Hampshire!

Tuesday, January 3, 2012

“2011 – The Year in Stats”

Sydney M. Williams

Thought of the Day
“2011 – The Year in Stats”
January 3, 2012

In the continuum of markets, January 3rd is nothing more than the first trading day after December 30th, but the calendar adds weight to the date. As investors we are provided a clean slate. We have been absolved (momentarily) of our errors and provided an opportunity to start anew. We resolve not to fall for the insidious and tempting traps that are placed before us; yet we know full well that will be one of first resolutions broken. Our desire to succeed too often makes us reckless.

In retrospect, the U.S. stock market in 2011 was reminiscent of a college road trip: We traveled a long way, but ended where we started. We had good times, but we also did things that we regret. We got high, and then sobered up. We left filled with optimism and arrived back home somewhat the worse for wear, wondering – was the experience worth the expense? Or was it “a whole lotta nothing?”

Earnings rose, as did dividends; so that stocks are less expensive today than a year ago. On the other hand, governments did nothing to curtail spending, so that federal debt is higher than a year earlier. Congress and the Administration seem incapable of accepting reality. The Federal Reserve kept interest rates artificially low, creating the potential of a Tsunami when they are finally unleashed. Our problems pale in comparison to those in Europe, and China’s economy looks to be slowing. Both adding weight to the load we must bear. Here at home, nothing was done about a pending crisis in terms of obligations promised by governments (and unions) that can never be honored. Congress continues to function like characters in Alice’s dream-like Wonderland. Unsurprisingly, their approval ratings are substantially below that of Lindsay Lohan.

There are about 255 trading days in a given year. The S&P 500 closed flat on the year, while trading within a 24% range during the last year’s approximately 255 days. During the year the Dow Jones Averages closed up or down 1.5% on 52 days, 45 of them in the last six months, and closed the year up 5.5%. The total return for the DJIA, including dividends of 3.01%, places the year close to the long term average return. But, somehow it didn’t feel that way.

U.S. Treasuries provided the year’s best gains, with the yield on the Ten-Year declining 43.2 percent and the yield on the Five-Year falling 58.7 percent, implying significant capital gains. The Yield Curve remained relatively steep, though began to flatten in the second half. Reflecting that flight to quality, emerging markets had a tough year, with India declining 39.8 percent and China’s small cap stocks falling 35.8 percent.

With the exception of oil and gold, commodities declined over the year, with most of the loss coming in the last nine months. In sympathy, Australia and Canada’s equity markets were down 15.7 percent and 14.2 percent respectively.

In the U.S., large cap stocks did better than small caps, and growth outperformed value. Nevertheless, equity mutual funds lost assets to bond and money market funds. Importantly, however, dividends on S&P 500 stocks rose 18.7 percent.

There are other factors worth noting: 1) Money supply expanded 9 percent, something to be monitored, as inflation in 2011 grew at 3.2 percent (2.8 percent in the 1st half and 3.6 percent in the second half.) November inflation numbers are 150 basis points greater than the yield on the Ten-Year. Either inflation will moderate or holders of U.S. Treasuries are in for a rude shock. 2) Volatility has declined in the past six weeks, as measured by the VIX and in terms of daily volatility. That fact, along with companies continuing to increase dividends, may bode well for stocks in 2012. 3) GDP growth has been anemic. During the first three quarters of 2011 GDP growth averaged 1.2 percent, versus 2.6 percent in 2010 and 4.2 percent in the second half of 2009. Modest and slowing economic growth, with persistently high unemployment, will raise concerns about Mr. Obama’s re-election prospects. Expectations are that 2011’s 4th quarter GDP will show acceleration, but 2012’s growth will be challenged by Europe, which appears to be slipping into recession, and what appears to be a slowdown in China. And 4) Meredith Whitney was proven wrong (or early) in her expectation of a number of municipal failures. The municipal bond I-Shares rose 7.2%. Price appreciation plus interest provided about an 11% return in 2011.

Attached are some numbers for 2011 from a work sheet that I look at. When considering myriad economic and market data and trying to make sense of so many conflicting statistics, I am always reminded of what Bruce Hackett, one of my many bosses at Salomon Brothers, used to say: “My mother never said it would be easy!”

………………………………………………………..

I will be out for a week of skiing, again providing relief to those who read my daily musings. However, it is possible that the foibles of individuals or the quirkiness of events may prove irresistible, and I will be unable to restrain myself.