Monday, April 30, 2012

“What’s Liberal About a Mandate?”

Sydney M. Williams

Thought of the Day
“What’s Liberal About a Mandate?”
April 30, 2012

It is about time that a campaign was initiated to restore the word “liberal” to its rightful owners – those who believe that the rights of individuals supersede those of the state. While the concept of such an insurrection may seem arcane, its relevance has to do with what has been a gradual, but insidious, encroachment on individual rights by an increasingly intrusive central government, a government led by a Party that mis-characterizes itself as liberal. I recognize my chances of getting modern day statists to cede the word are virtually nil, but I feel better for the attempt.

Words have meaning, but meanings can be misconstrued. Democrats are better than Republicans in using words to their advantage. A good example is the word “liberal.” So when European Central Bank President Mario Draghi recently acknowledged that Socialism does not work as quickly or as efficiently as the private sector, when it comes to growing economies and putting people to work he was criticized. He urged the states to consider a “growth pact”, which would encourage the reduction of taxes, the easing of regulation and letting markets work. His goal was not austerity; it was growth fueled by classical liberalism.

The modern usage of the word has been used for most of the 20th Century. Carter Glass (1858-1946), a former newspaperman and Congressman once defined a liberal as “a man who is willing to spend someone else’s money.” Thomas Sowell was less politically correct: “Liberalism is totalitarianism with a human face.” The point is that what we call liberalism is in fact Socialism, or statism. Mistakenly, some Republicans see the word “liberal” as a pejorative term. It is not. However, in contrast Democrats love to call Republicans conservative. It implies an old, sour-faced white man stuck in his ways. That too is false. Both Parties are concerned about the future. They differ in how to get there. Democrats prefer to be led by the state; Republicans by the creativity and risk-taking of individuals.

What, for example, was liberal in the words of M. Hollande when, in a speech last Tuesday, he declared: “If I am elected president, there will be a change in the focus of Europe’s construction. Enough free market, limitless competition, enough austerity!”? In his Two Treatises of Government, John Locke wrote that should government become tyrannical and deviate from the “Compact” – an agreement in which the people relinquish some freedom in exchange for security and stability in their lives – the people have the right to overthrow that government. Our government has not become tyrannical…yet, but it is certainly expanding its reach and curtailing rights in a decidedly illiberal fashion.

Today, government justifies its increased powers on a belief that a beneficent state is “liberal”, when it assumes responsibility for those who cannot care for themselves. However, it has gone much further – protecting people and institutions from the consequences of their own actions. In short, by removing risk from the lives of its citizens, government has promoted moral hazard, by creating a culture of dependency. What is worrisome to those who fear an omniscient state is that increasing numbers of people are choosing to be succored to the risk of failure, thereby giving up the opportunity for exceptional success. We see this trend in fewer people paying federal income tax, and more people relying on government for some form of sustenance, whether Social Security, Medicaid, or whatever. They become imprisoned in their own dependency and are, in fact, less free. According to the Bureau of Labor Statistics (BLS), since Mr. Obama became President in 2009, the working age population has grown by 5.7 million, the number of employed has grown by 3.6 million and the number of Americans on disability insurance has grown by 5.4 million – an unsustainable trend for a democracy that purports to foster individual freedom. A major success of the President – one which he will not crow about – is that 50% more people have been added to the disability list than to employment rosters.

Liberalism first became a force during the Age of Enlightenment, a period that encompassed the late 17th and most of the 18th Century. It gave birth to some of history’s most notable brilliant thinkers – Thomas Hobbes, John Locke, Isaac Newton, Voltaire, Jean-Jacques Rousseau and Immanuel Kant. It began with a belief in a rational, orderly and comprehensible universe. It asserted that law governed both heavenly and human affairs. It focused on the belief that individual liberty was a fundamental right of man. It gave birth to the ideas that prompted the American and French Revolutions; its ideas are embedded in our Declaration of Independence and Bill of Rights.

Government exists to serve the needs of the people and the community it governs. Its power is (or should be) limited by concepts of natural rights of individuals and moral or natural law. There has always been disagreement as to what that balance should be – those differences are reflected in the desire for more government by our President and the sense that government has already over-reached by Libertarians. It is indisputable that the more power government assumes the less freedom the people have. The indefinable nature of the balance between government and personal freedom brings to mind Justice Stewart Potter’s concurring opinion, in seeking a threshold test for pornography (Jacobellis v. Ohio, 1964.) “I shall not today attempt further to define the kind of material I understand to be embraced within that shorthand description, and perhaps I could never succeed in intelligibly doing so. But I know it when I see it.” Many of us see our basic freedoms imperiled by the imperial reach of government.

As government’s share of GDP increases, two things happen. One is that people become less free; for more of their money must go to pay taxes for government’s expanding role. (Or the government simply borrows the money, thereby indebting future generations – think Social Security, Medicare, Medicaid and the ACA.) The second inevitability, as Alan Meltzer points out in his imminently readable book, Why Capitalism?, is that redistribution sacrifices future economic growth so that today’s demands are satiated. Guy Sorman, writing in the current issue of City Journal, in an article entitled Schumpeter in the White House, put it this way: “…when a state steps in to help a dying sector, it is actually harming economic growth by sinking financial capital – a limited resource – into inefficient activities and diverting funds from more innovative enterprises.” That is a choice the people must make, but they should do so with their eyes wide open, and not be swayed by the misuse of words. It is this debate that is at the essence of this fall’s election. It is this debate around which swirls the definition of “liberal.”

Regulation is too often and too easily deployed with very little emphasis or concern about consequences. The Dodd-Frank Bill is a good example. Was it liberal to leave banks too big to fail? Is it liberal to let taxpayers be at risk? Would it not have been simpler and fairer to just demand higher equity capital requirements, as banks get bigger? Professor Meltzer points out that during the Great Depression not one large New York bank failed. They all had equity ratios closer to 15 percent, versus less than 10 percent today. The Department of Labor is proposing a ban on children working on family farms, which seems an unnecessary intrusion into our personal lives, besides requiring an additional 4000 inspectors to make sure that such idiotic and illiberal policies are obeyed.

The future is never clear. All we know is that it will be different – either more or less free. Empirical evidence demonstrates that societies that are more liberal, in terms of providing more freedom to individuals, and therefore operate with proportionately smaller governments generate greater economic growth. Supporters of democratic socialism argue that their form of government is “fairer”, but is it fairer to limit opportunity for the aspirant, to the creative and the ones willing to work hard and take risk? We know such restrictions cannot be more liberal. Is there anything liberal about redistributing someone else’s hard-earned tax dollars? Is there anything liberal about mandating someone buy health insurance?

Immanuel Kant taught us that man is fallible. He can be both malicious and greedy. Because he works for government does not eradicate those qualities. In fact, it is arguable that he is more dangerous operating wrapped in the mantle of government, for it is assumed by many that he has the common interest at heart. Words can be deceptive and their meanings distorted. The word “liberal” is a classic example. Isn’t it time that the word was restored to its original meaning and to its rightful owners?

Wednesday, April 25, 2012

“Wisconsin Recall”

Sydney M. Williams

Thought of the Day
“Wisconsin Recall”
April 25, 2012

Everybody knows – we have been told time and again – that the only way out of the debt and deficit crisis is to make tough, unpopular decisions, whether it is reducing spending or raising taxes. Given governments propensity to spend is akin to an alcoholic’s dependency on booze, we all know the only answer is to remove the bottle. The problem is that when one does, the opposition comes out of the woodwork. No one knows that better than Governor Scott Walker of Wisconsin.

When Scott Walker was elected Governor, he inherited a budget deficit of $3.6 billion. His crime is that, in an attempt to close the deficit, he chose to restrict collective bargaining rights, while providing choice to union employees – the choice, for example, to either join a union and pay the monthly fees, or not. He also required government employees to pay a larger share of their healthcare and pension costs. The Bill that caused so much consternation simply replaced collective bargaining with distributive bargaining, pushing down negotiations to the local school district level. Writing in the American Thinker a year ago, Tim Peterson, Robert Simandi and John Maddente noted: “public employment has become a fiefdom of privilege where, owing to binding interest arbitration based upon comparability often results in local government compensation exceeding ‘middle class’ standards.”

The other heinous thing that Governor Walker did was to require that state unionized employees (mostly teachers, of which there are 59,400) pay a portion of their retirement and health plans. Teachers belong to the Wisconsin state pension plan that requires a 6.8% employer contribution and 6.2% from the employee. However, according to the collective-bargaining agreement in place since 1996, the district pays the employees’ share as well. Under the same agreement, the union employees’ premiums for health insurance are also picked up by the taxpayer – an amount that equals about four times what the private sector employee is granted..

The election, which is expected to cost more than $100 million (and most of which is coming from out of state,) is fast approaching. Primary elections will be held on Tuesday, May 8 to select a Democrat for governor, lieutenant governor and four state senators. The general election will be held on Tuesday, June 5.

While the left wing press has risen in unison with national unions in condemning what they claim are violation of their rights, which is odd because neither the U.S. Constitution nor the Wisconsin Constitution identifies collective bargaining as a ‘right.’ In fact, that patron saint of the American labor movement, President Franklin Roosevelt warned: “All government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations. The very nature and purposes of government make it impossible for officials to bind the employer. The employer is the whole people, who speak by means of laws enacted by their representatives.” We have the natural rights, embodied in our inalienable rights of life, liberty and the pursuit of happiness. We have Civil Rights that belong to every citizen. And we have political rights, for example the right to vote and the right to hold office; but no where is it given that any of us has the ‘right’ to collectively bargain.

In truth, the battle in Wisconsin is all about money, not wages and benefits for union workers, but for the dues that go to union leaders and which are primarily used as campaign contributions to elect Democrats who, in a symbiotic relationship with union members, keep one another employed. The dollars involved are massive, which is why unions spent so much money in Indiana and Ohio and are now doing so in Arizona and Wisconsin. There are currently about 15 million union members in the U.S., according to the Bureau of Labor Statistics, more than half of whom are public sector workers. The average annual dues for a union member is $400, meaning that union leaders – more than half of whom are paid by taxpayers – have about $6 billion to disperse each year. In Wisconsin the 59,400 teachers pay an average of $1100 in annual dues, providing their leaders with a little more than $63 million of taxpayer money to distribute as they seem fit, again mostly to Democratic politicians in their consentaneous relationship with union members.

A key point, often forgotten by both elected and appointed government workers, is that they work for the people – not the other way around. And government workers have a responsibility to treat the dollars they receive in compensation and expense with the respect due someone else’s money. Unfortunately, as we see almost daily, politicians and government employees spend our money as though its supply were endless. They are quick to raise revenues and slow to cut spending. H.L. Mencken once wrote: “When a new source of taxation is found it never means, in practice, that an old source is abandoned. It merely means that politicians have two ways of milking the taxpayer where they had only one before.”

The recall election in Wisconsin has been deemed the second most important election in 2012, after the Presidential election. Because it precedes the broader election it may be more important. We face an unsustainable predicament. Union leaders have promised, and politicians have guaranteed, a future that is not possible. There simply is not enough money. It is not about what is fair. It is about math. Staying the course bankrupts first the municipality, second the state and lastly the nation. Before the dreams people are embracing become a nightmare, reality must be faced. Governor Scott Walker is on the front line. Within six weeks the nation will know which course Wisconsin has taken – a future that will move us forward, perhaps unevenly, and certainly unfairly, and likely not at the pace we might have chosen, or a course that condemns us to a fate that looks more like Greece, Italy, Spain, Portugal, Ireland or even, God forbid, France.

Tuesday, April 24, 2012

“Why I Remain a Long Term Optimist”

Sydney M. Williams

Thought of the Day
“Why I Remain a Long Term Optimist”
April 24. 2012

The statement may seem odd. We live at a time when our politics are fractured. There are those like our President who believe that when your doorbell rings and the person standing there says, “I’m from the government and I’m here to help,” one should smile and invite them in. On the other hand, there are those, among whom I reside, who would immediately slam the door – a lesson well learned from President Reagan.

Despite Capitalism's defeat of Socialism in Margaret Thatcher’s UK and Communism in 1989, the lessons of free markets have gone unlearnt in places as diverse as Argentina and France, and among the left wing element in the U.S., including our President. In Argentina, President Christina Kirchner has seized the Spanish energy company Repsol’s 57% ownership of the Argentinean oil company YPF. In the first-round vote, French voters gave more votes to Socialist Party leader Francois Hollande than to President Nicholas Sarkozy, apparently unconcerned or ignorant as to the history of economic failure under Socialism.

In the United States, the far left, led by Mr. Obama with his policies of redistribution and division, argues the “unfairness” of capitalism. It is the only offense he can muster. As Margaret Thatcher wrote in her autobiography, The Downing Street Years, “Deprived for the moment at least of the opportunity to chastise the Government and blame free enterprise capitalism for failing to create jobs and raise living standards, the left turned their attention to non-economic issues.” We have seen exactly that response on the part of the far left in the U.S. The “Happy Planet Index” is but one manifestation. Others would include the absurd amount of power the Administration has provided appointees to the Environmental Protection Agency and the regulation for which they are responsible; and their emphasis on global warming, while ignoring the questionable science surrounding it. The President’s constant harping “it’s not fair,” as he chastises “millionaires and billionaires,” is a means of diverting attention from his disastrous fiscal policies.

The U.S., with $15.7 trillion in federal debt, is facing a massive debt crisis. Growth has been too anemic to bring the unemployment numbers down quickly and too slow to ramp up tax revenues. The Administration has focused on raising taxes, which will assuredly slow growth and therefore reduce tax receipts. Much of the economic growth over the past couple of decades was a result of increased consumer leverage. The consumer represents approximately 70% of the economy. Most of that debt was focused on mortgages and credit cards, both of which today are being paid down. The only growth area in consumer indebtedness today is student loans, which have a much smaller multiplying effect on the economy. More than offsetting consumer debt reduction has been the increase in federal debt, which also has a very slim multiplying effect. Government borrowing does not generate the growth private borrowing does.

One frightening possibility the government could employ, should we be hit with another unforeseen market meltdown might be to mandate that 50% of all retirement funds be invested in U.S. government securities. While I think that is a low probability, the $16 trillion to $18 trillion in 401(k), IRA pension plan and other retirement accounts must appear a tempting pool of money for politicians faced with run-a-away deficits and no apparent interest in, or aptitude for, curtailing spending. As far fetched as that seems, Gregory Bresiger writing in Saturday’s New York Post, notes that at least two Congressional commissions are currently studying means of tapping this source.

Nevertheless, and despite the discouraging news we read each day, from Iran to North Korea to California, I remain a long term optimist. For those who believe in the importance of the individual, the powerful force that is freedom and a capitalist system based on a rule of law, it is hard to get too pessimistic given the remarkable inroads capitalism has made in the last two decades. Providing support to the concept of American exceptionalism, we alone among the developed nations of the world continue to increase our population. Naysayers from Thomas Malthus, to the Luddites of the 19th Century, to the Club of Rome in the 20th Century warned of over population and the concern that machines would replace all human jobs. They have all proved too negative. Philip Auerswald, in an excerpt from his forthcoming book, The Coming Prosperity, writes: “Over the long term, the evidence supports the claim that the creativity of individuals powers human productivity and the improvements in societal well-being that follow.” We are also unique in the abundance of our natural resources, should we decide to tap them. We are truly a favored and blessed nation.

Thus far the forces of creative destruction have not diminished the search for new technologies, especially in the field of communication and the collaboration that entails, but is there a limit to how fast we must run? No one knows, but my bet is on man. Mr. Auerswald adds: “A combination of entrepreneurship, technological innovation and broad societal transformation are giving even children born in the most persistently poor places a chance to benefit from and contribute to the vitality of global markets and communities of collaborative action.”

Endemic to left wingers, and to those who believe that salvation is solely derived from a strong and benevolent central government, is an inherent pessimism. It is based on their assumption that capitalism produces inequities that can only be addressed by government, a belief that ignores Newton’s Law that dictates that as government power increases there is an equal and off-setting diminution in personal freedom. Statists and illiberal Leftists do not have faith in the individual, ergo their pessimism. If one believes that individual freedoms, which are always at risk, will be lost, one cannot be optimistic.

Over the past decade and a half, the world has undergone a massive shift. Sea-changes are notoriously difficult. They always have been. The whaleman rued the discovery of oil in Pennsylvania. The telegraph made obsolete the Pony Express. Makers of horseshoes and buggy whips were left jobless as the internal combustion engine replaced the horse. The internet and communication are radically changing today’s world, in some ways for the better and some ways not, but that is the way with ideas and people. Yet the world has grown far richer today than twenty years ago. My mother, who died twenty-two years ago, would barely recognize the world we live in today. As we know, man is not perfect, nor is any system, but capitalism works better than any other system yet devised. It marches hand-in-hand with freedom. Ariel sings to a bereaving Ferdinand in Shakespeare’s The Tempest about the loss at sea of his father, of how his eyes have become pearls and his bones, coral, “Nothing of him that doth fade, but doth suffer a sea-change.”

Eric Brynjolfsson and Andrew McAfee of the Sloan School at M.I.T. have a new book, Race Against the Machine. In the book they argue that we are neither in a ‘Great Recession’ nor in a ‘Great Stagnation’, but rather we are in the early stages of a ‘Great Restructuring’, driven by technology that is advancing faster than our skills. While they recognize that progress will leave some people behind and that outcomes will not be even, they conclude on an upbeat note – that the tools being developed will improve our lives and our world.

My optimism does not translate into a belief that stocks will go straight up, or that Israel and Iran will walk off into the sunset hand-in-hand; nor does it suggest that the economy will suddenly get much better, or that North Korea will pull a mea culpa, or even that Germany will encourage its citizens to visit the Acropolis on their next vacation. We face numerous problems, but we are acknowledging them, if not confronting them. When I read that faith in institutions has fallen dramatically between 2002 and 2012 – in banks it has declined from 47% to 23% and in the Presidency it has fallen from 58% to 35% – I know that we are not at the start of a decline. Ron Fournier and Sophie Quinton authored an interesting piece entitled, In Nothing We Trust for National Journal. They wrote of traditional churches losing congregations, of parents disillusioned with overcrowded public schools, of out-of-work people unhappy with their former public and/or private employers and unions. Government does not seem responsive. They know not where or to whom to turn. But the process of change has begun. Mega churches with charismatic preachers are expanding; the number of children attending charter schools has increased fourfold in the past decade – the changes are driven by competition. The two parties represent competition in government, at least at the top. Unfortunately there is little competition in government bureaucracies, and public employee unions have made things far worse.

In the end, however, my optimism is based upon a belief in the people of our country, both individually and collectively. Tough times have confronted people in the past – wars, depressions – but individuals persevered and our economy continued to grow, enriching a few, impoverishing others, but raising living standards for all. Free enterprise and capitalism is not a perfect system, but man is not perfect. Nevertheless, the spread of capitalism continues, despite temporary setbacks. In his new book, Why Capitalism?, Professor Allan Meltzer writes: “Instead of ending, as some critics suppose, capitalism has spread to cultures as different as Brazil, Chile, China, Japan and [South] Korea. It is the only system humans have found in which personal freedom, progress and opportunities coexist. Most of the faults and flaws on which critics dwell are human faults, as Immanuel Kant recognized. Capitalism is the only system that adapts to all manner of cultural and institutional differences. It continues to spread and adapt and will continue to do so for the foreseeable future, as long as people value both growth and freedom.”

Many will consider me naïve, and perhaps I am. There will certainly be setbacks, such as what we are now experiencing. Foolish regulation will create more problems than it solves. People, after all, are human. Malice and ignorance are both human conditions, but so are creativity, aspiration and intelligence.

However, I am thinking long term. The future is for the young; in my family that means it is for my grandchildren. I am not as down on their prospects as are many that I know. I hope that I am right. I believe that I am. The best gift we can provide the next generation is the best education we can offer. My assumption is that, over time, both freedom and economic growth will persist, and that provides the fuel for my optimism. And I believe people have the inherent sense to choose the option that favors freedom.

Monday, April 23, 2012

“The Healthcare Bill – More Drivel”

Sydney M. Williams

Thought of the Day
“The Healthcare Bill – More Drivel”
April 23, 2012

It is always fascinating to read, from an otherwise intelligent person, what at best can be called blissfully ignorant observations, or at worse nothing more than ideological blather. Such a piece appeared in Friday’s Wall Street Journal, Life, Liberty and the Pursuit of Insurance by Alan Blinder, an obviously intelligent, though equally obviously misguided, former vice chairman of the Federal Reserve and now a professor of economics and public affairs at Princeton.

His point, like numerous other left-wingers including our President, is that the passage of the Affordable Care Act (ACA) was approved by elected representatives, and therefore should be left alone by the Court. Professor Blinder, of course, leaves unanswered the question that if the Justices are not supposed to determine the Constitutionality of Congress’ laws, what are they supposed to do? (It is a question that does not appear to trouble our President who made the same observation as did Mr. Blinder, though somewhat more bluntly – that Justices should leave alone what Congress has passed and which his lordship has signed.) Or perhaps the professor might be happy if there were only two branches of government? Although I suspect the answer to that depends upon the makeup of the Court. Professor Blinder demonstrates his bias when he cites two other cases that were, in his opinion, decided purely on political, not legal, grounds – Bush v. Gore and Citizens United.

The professor poses a question, which of course has nothing to do with Justices deliberation: “Is it sensible to have nine lawyers decide what sort of healthcare payment system the nation should have?” What’s he talking about? The Justices are simply attempting to determine the Constitutionality of a bill that barely passed and which did not receive one vote from the opposition party. In fact, former Democratic Representative Artur Davis of Alabama said of the Bill: “I think the Affordable Care Act is the single least popular piece of major domestic legislation in the last 70 years. It was not popular when it passed; it’s less popular today.” Even the most leftist of Democrats, Elizabeth Warren and Barney Frank, have found aspects they do not like with the Bill.

In general, left wingers have done a far better job than their conservative brethren in cloaking their rhetoric in prose that has mass appeal, often, however, using a phrase that stretches the truth. For example, the professor writes of how this (healthcare payments) is “no small matter. Over one-sixth of our economy is at stake.” And then he tosses in the mandatory words about life, liberty and pursuit of happiness being inalienable, and throws in a zinger: “Access to affordable health care is surely essential to two of these three rights.”

While the founders, being magnanimous souls, would have wished us all to have affordable health care, I am not so certain that is what they meant by declaring that life, liberty and the pursuit of happiness are inalienable rights. Even in those distant times, people needed sustenance to live, yet the founders said nothing about the state ensuring everyone was entitled to having enough food to eat or water to drink. Perhaps Professor Blinder feels that was an oversight, which we should now correct.

It is, of course, because healthcare does represent such a substantial portion of our economy that has those who believe in free markets somewhat nervous. Government is never about efficiency. It will claim to be about “fairness”, but it is really about power. If President Obama really believed in the efficiency and goodness of government he would not have made the generous charitable contributions he did; he would have paid a higher tax rate than his secretary, and then let the GSA administer his dollars.

While my tone may be somewhat cavalier, these are serious issues. For better or for worse, our government is based on a balance between three branches, each of equal importance. We can disagree with those in any branch, but the structure has served us well for two hundred and twenty-five years. President Franklin Roosevelt tried to change what he did not like about the Court and got slapped for his troubles. Mr. Obama has been the second most intrusive of our Presidents in visually showing his disapproval with the Court (once dissing the Justices during a State of the Union speech.) The President’s conduct was, and is, unbecoming, especially for a trained lawyer serving in the nation’s highest office.

Healthcare, like any other service, will never be administered exactly fairly. Man is imperfect, as Immanuel Kant said. There are those who live in greater proximity to good doctors and facilities. There are those who are wealthier and so better able to afford better treatment. The biggest problem with healthcare is that it is not a free and competitive market. Insurance companies are precluded from competing across state lines, with each of the fifty states having their own regulatory procedures. Because the payment system has been based for sixty-seven years on employer coverage, the consumer has been excluded from the payment equation.

Health insurance, were it owned by the consumer, as are auto and home policies, would be portable. Companies should be required to cover pre-existing conditions, but portability would reduce the issue. And, it should be understood, that any requirement such as coverage of pre-existing conditions will mean higher premiums, but that is as it should be. Competition would keep rates reasonable. The other benefit of getting the consumer more involved in the pricing mechanism is that the market would discover that most people want to be insured against catastrophic occurrences, not routine procedures, again much like our home and auto policies. That would cause consumers to be more price conscious when visiting a doctor or druggist.

What is most disheartening about Professor Blinder’s op-ed is the implicit and unspoken disillusionment with the system of free markets that have served this country and its people so well for so long – his recommendation that one sixth of our economy, about $2.5 trillion, would be better off under the arm of government than in the hands of private citizens. For there is no question that the Affordable Care Act is designed to ultimately result in a single payer. He writes that were he a Martian (he sounds more like a Chavezist!) he would find it incomprehensible that those aged 65 or older are provided healthcare, while those that are younger must fend for themselves. First, the professor ignores an estimated 58 million Americans that are on Medicaid. And, second, the 40 million Americans on Medicare have been paying into the system for years. Both systems are destined to go bust; so why does Mr. Blinder feel that adding the other 200 million will somehow fix the system? It makes no sense. It’s pure drivel.

“Shareholder Revolt?”

Sydney M. Williams

Thought of the Day
“Shareholder Revolt?”
April 20, 2012

“When do the directors cut a CEO’s salary? When disaster strikes, when the ground heaves, the walls buckle, and the roof caves in, when the wreckage is all around. Then the board, if it survives, sits up and takes action.”

Harold Geneen (1910-1997), President and CEO of ITT from 1959-1977 and board member of numerous companies, uttered those words in 1987. And directors today often seem less responsive than they did twenty-five years ago. It is an irony of the investment world that as institutions came to dominate the world of equity holdings, boards appear to have become less responsive to the needs of shareholders. A legitimate question is, why? One answer that I have offered before lies with the increasing focus of institutional investors on the short term; for many money managers companies are not businesses; they are chips in a casino.

Shareholders may be getting fed up. At Citigroup’s annual meeting in Dallas last Monday, 55% of shareholders voted against the pay packages awarded to its top executives, including CEO Vikram Pandit’s $15 million pay package and $10 million retention pay – seemingly excessive given that shareholders lost 44.4% of their investments in 2011. (The vote, required by Dodd-Frank, is not binding.) Shares of Citigroup are 93% below the highs reached in December 2006 and 88% below where they were when Mr. Pandit took the reins in December 2007. Mr. Pandit cannot be held responsible for the terrible damage previous management inflicted on shareholders (and taxpayers), but the sale of his hedge fund, Old Lane LLC, to Citigroup for $800 million certainly benefitted him more than shareholders. And, as CEO for the last four years, he does bear some of the responsibility.

As CEO pay has risen over the past dozen years, hapless shareholders have been left in the dust. Stocks today are lower than they were a dozen years ago. Last year, four of the highest paid CEOs of S&P 500 companies saw their stocks decline, on average 19%. Granted, dividends have increased for some companies, but the intent of the President is to raise taxes on this form of income as much as 153%, regardless that, given the number of people reaching retirement age and the underfunded nature of most retirement funds, saving and investing should be encouraged, not discouraged.

Just as many government employees act as though they are entitled to our money – something term limits would address for members of Congress – so it seems that some CEOs see the public companies they run as private piggy banks, ignoring the owners of the business. (Obviously my comments are not directed at companies managed by founders who maintain a large ownership position.) And too often we see boards of directors, supposedly there to represent the shareholders, instead acting as puppets of the CEO.

An equity investment, by definition, is risky; something that at times is forgotten. Nevertheless, that is no excuse for managements to ignore their owners, or for boards of directors to reward managers at the expense of shareholders. While my comments apply to all public companies – wherever managements have been allowed to trivialize shareholders – financial institutions have been especially susceptible. Over the past few years managements have risked shareholders’ and, in the case of MF Global, depositor’s money. The rewards have gone almost exclusively to themselves. The risk, however, has been borne by shareholders. What got these financial institutions into trouble in 2008 was greed, hubris and a sense their institutions were “too big to fail.” What saved them were taxpayers and long suffering shareholders. It was good to see a shareholder revolt, as we did on Monday. Let’s hope it is more than a one time event.

Wednesday, April 18, 2012

“It’s All About the Math”

Sydney M. Williams

Thought of the Day
“It’s All About the Math”
April 18, 2012

Mr. Obama clearly and cleverly understands that 99 is larger than 1. So, there is little surprise in his decision to associate his re-election with the ninety-nine percent and let the one percent dangle. Who wouldn’t? And he even attracts a few sanctimonious one percenters, like his pals Warren Buffett, George Soros and myriad stars and starlets from Tinseltown. But when it comes to the federal debt and on-going deficit spending, Mr. Obama starts doing arithmetical gymnastics. He understands that the more people become dependent on government, the more entrenched is his own future as President. Looking a gift horse in the face is a concept Mr. Obama clearly understands. People express their gratefulness for gifts received; no concern is registered by either grantor or grantee that bankruptcy may be the end game. The yellow brick road, to these people, has no terminus.

The vote Monday in the Senate on the “Buffett Rule” was pure theater. The President knew the outcome ahead of time, as did the Senators. Professor Allan Meltzer has estimated that the U.S. unfunded healthcare liability is $72 trillion. Suggesting that the Buffett Rule will help solve it is an insult to the American public. The President preaches that class warfare is not class warfare. Instead of platitudes about “fairness” and debating the math when it comes to taxes, Mr. Obama would be better off listening to Daniel Mitchell of the Cato Institute. Mr. Mitchell recently wrote a much needed lesson on behavioral economics (which in matters like taxes is more relevant than math): “When the government taxes income, it raises the price of work compared to leisure. And because the tax code penalizes capital gains with higher rates, it also raises the price of savings and investment compared to consumption.” Newton’s Law applies. For every action, there is an equal and opposite reaction.

Combined U.S. household and government debt added up to more than $30 trillion at the end of 2011, according to an article in yesterday’s Investor’s Business Daily. “By that measure,” the paper notes, “debt was 50% higher in real terms than at the start of the recovery in 2001. Compared to the 1991 and 1982 recoveries, debt was, respectively, 88% and 230% higher.” If the President wants to focus on math, he would be wise to turn to the deficits – and not persist with his preference, which is spending. Never for a moment did I sense that the President actually believed his own rhetoric that the Affordable Care Act would allow for debt reduction. Even this President who seems numeracy-challenged is capable of such simple extrapolation that providing healthcare to more people increases costs. And, sure enough, over the past few months, the independent Congressional Budget Office (CBO) persists in raising the cost estimates of Obamacare, both in terms of services to be provided and the taxes needed to pay for it.

Europe provides exhibit ‘A’ when it comes to the ugly mathematical reality of promising and spending more than one has. Nations such as Greece, Italy, Spain, Portugal and Ireland are in a death spiral. They cannot spend their way out and austerity would condemn them to years of poverty. They must, somehow, revalue their currency, which definitionally means leaving the Euro as we know it. The culprit, no matter what we call it, is socialism. Of course, there are exhibits closer to home. California is one. With an income tax rate of 10.55%, California has the highest rate behind only Hawaii and Oregon, both at 11 percent. For the first time in its history California lost residents, according to the most recent census. Three demographic profiles were identified by Arthur Laffer that characterizes those leaving the state: higher intelligence, younger adults, and business owners & high earners – hardly a vote of confidence for the “nanny” state. Mr. Laffer estimates that California has lost $44 billion in tax revenues from the 869,000 people who have left the state over the past sixteen years. Texas, with no income tax, attracted the most residents, which is another lesson in behavioral economics. Austin is my personal bet to be the fastest growing city in the U.S. during the 21st Century.

The President is correct; the problem we face is all about math. We spend more than we take in and have done so for years. It as simple as that. The fundamental choice we face is the size of government we want. More costs more. For those who desire government to provide an increasing level of services, they must understand it cannot come on the back of the one percent. They don’t have enough money. It can only come by raising taxes on the middle class. The math does not lie. And, as Professor Meltzer makes clear in his new book, Why Capitalism?, the price we pay will be a lower standard of living for all. A table in his book makes the point clearly. The comparative economic growth rates for France and Germany noticeably slowed from the 1980s to the years between 1990 and 2006. Socialism impedes economic growth.

Economist Dr. Lacy Hunt, president of Hoisington Investment Management in Houston, recently wrote of the negative feedback loop arising from the unproductive nature of government debt: “First, United States government spending carries a zero expenditure multiplier, as do operating expenditures of state and local governments. Thus each dollar spent by the federal government creates no sustainable income, yet the interest payment incurred with each borrowed dollar creates a subtraction from future revenue streams of the private sector.”

David Brooks, in a somewhat Milquetoast-like, “something for everyone” column in yesterday’s New York Times entitled The White House Argument, wrote: “According to the Committee for a Responsible Budget, by 2050 , Representative Paul Ryan’s budget would cut total public debt to 10% of GDP. Current law would put debt at 42% of GDP. Under the Obama budget, debt would skyrocket to 124% of GDP. Mr. Brooks also notes that annual interest expense will be $915 billion in 2022, a number I presume he arrives at using projected deficits and current interest rates. However, should government relax its rules, reform the tax code and attempt to stimulate investment by the private sector, the deficit could well be smaller. On the other hand, raising taxes and increasing regulatory and environmental restrictions would likely cause the deficit to expand. Additionally, interest rates are at artificially low levels. Should they rise to more normal levels, as seems highly likely over the next ten years, interest costs could well be double what they are expected to be.

It is, as the President likes to repeat, about the math. But policy decisions also affect behavior, something that needs remembering.

Tuesday, April 17, 2012

“Guarding Freedom”

Sydney M. Williams

Thought of the Day
“Guarding Freedom”
April 17, 2012

There are times when it takes a revolution to overthrow or change an oppressive regime, as happened in England in 1642, America in 1776 and France in 1789. There is nothing permanent in our world, especially governments. While ours is a relatively liberal government, we should never feel complacent. There have been times when oppression slips silently in, as though on Carl Sandburg's “little cat feet”, as Mussolini did when he became Italy’s 40th Prime Minister in 1922, and as Hitler did when he became the German Chancellor in 1933.

As difficult as it is to understand today, no Italian in 1922 or German in 1933 could foresee the terrible chain of events that would follow those “democratic” elections. The changes were incremental and insidious. It was akin to placing a lobster in tepid water and letting it gradually heat up. By the time the lobster realizes what is going on, it’s too late. The lesson from history is that democracies must be ever vigilant of giving more and more power to central governments.

A good man, in a position of power, is no threat, but if the legislature has provided the executive branch unusual powers, a bad man can be elected and change the direction of the country. On February 27th, the House passed H.R 347 393-3, benignly entitled the Federal Restricted Buildings and Grounds Improvement Act, but better known as the anti-protest Trespass Bill. It had earlier been approved by the Senate. The Bill was signed by the President on March 10th, with little fanfare and has attracted very little attention. The Bill is an update of an original law enacted in 1971 that was amended in 2006, which dealt with restricted areas around the President and Vice President, or any others under the protection of the Secret Service.

The Bill makes it illegal to protest in areas where the Secret Service is operating, which can be from anything to a Presidential campaign stop to a super bowl. The restricted area may be mobile, again depending on the movement of Secret Service agents. And, since Secret Service agents are secret, they do not advertise their whereabouts.

One of the significant differences in this Bill from the one it amends is that “willfully and knowingly” has been changed to just “knowingly”, with respect to the mental state required to be charged with a crime. In other words, if a person enters a restricted area, but did not know it was illegal to do so, he could still be arrested. The odds are that the Bill will have little effect on most of our lives, but it does make it easier for an immoral individual to seize increasing power. For example, why could not a President target a political enemy for arrest and arrange for the Secret Service to be in that person’s location? It is a Bill that could be abused, and it is frightening for those who cherish the First Amendment to think that Congress approved it so overwhelmingly and that the President signed it with so little publicity.

All presidents have had to suffer the slings and arrows of those in the Press who do not like them or their policies. Freedom of the press is an inherent right, as is the right of all individuals to voice their disapproval. Protests, definitionally, are designed to disrupt. Certainly interruptions can be inconvenient to those being protested, but is not that a price we pay for living in a democracy?

As President, George Washington experienced brutal press attacks from the likes of Philip Freneau, Benjamin Franklin Bache, William Duane, James Thomas Callender and even, toward the end of his second term, Thomas Paine. Washington’s response was not to muzzle the press. In fact, he never took public notice of them. He wrote that his wish was that his “remaining days may be undisturbed and tranquil…” and that “I shall never undertake the painful process of recrimination.” Most Presidents would not abuse their power; it would not be compatible with the way they grew up, the history they learned and their basic sense for fairness and righteousness. But for we the people it is safer to trust laws than individuals. As a nation of laws, we should feel safe from the exploitation of laws that may have been well intentioned, but have been exploited by the unscrupulous for personal reason.

The Fourth Estate (the Press) has a responsibility to hold the feet of government leaders to the coals. Unfortunately mainstream media has put ideology above principle. It is why one should fear oppression from the left more than from the right; though cable TV and the Internet have somewhat evened the odds. The National Defense Authorization Act (another Bill that increases the reach of our central government) was originally enacted in the wake of 9/11. It has been renewed every year since, most recently on February 6. A person, including citizens, considered a terrorist threat can be held indefinitely, which is essentially a suspension of habeas corpus. The outcry when President Bush renewed the Act each year was loud and clear, but not so when President Obama signed the same extensions.

Returning to the anti-protest Trespass Bill, Mara Verheyden-Hilliard of the Partnership for Civil Justice (an organization the Washington Post has called “the constitutional sheriffs for a new protest generation”) acknowledges “it is easier to prosecute under ‘knowingly’, instead of ‘knowingly and willfully’”, but she does not feel the Bill will cripple the Constitution. It is hard to argue with her conclusions, but I return to my original concern. Freedom is lost not in a revolution, but in the gradual, but perfidious growth of centralized government.

In his last published book (American Politics, Then & Now and Other Essays) before his untimely death, James Q. Wilson wrote: “Well over half (58%) of Americans prefer personal freedom to a government safety net, but 60% of Europeans prefer the safety net to individual freedom.” As the recent crisis in Europe demonstrates, Europeans are now at risk of losing their safety net as well. Freedom is an inalienable right, which means it was not given us by government, but it can be taken away by government. Guard it well.

Monday, April 16, 2012

“A Quiet Revolution”

Sydney M. Williams

Thought of the Day
“A Quiet Revolution”
April 16, 2012

Surreptitiously, a revolution has been going on in the heartland of America. When he became President, Mr. Obama set as one of his goals the doubling of America’s exports over the next five years. The economist Tyler Cowen recently wrote: “At the time, critics called this an unrealistic promise, one that voters would forget by the 2012 election.” Instead, it appears that Mr. Obama may have caught a wave. But success will depend on his giving up his dreams of embracing “green” energy, and instead will require his support of fossil fuels, especially natural gas.

Mr. Obama had to have had greater knowledge of recent economic history than his critics. His goal was not that radical. For the five years between 2002 and 2007, U.S. exports rose 72%, from $I.006 trillion to $1.731 trillion. As a percent of GDP over those five years, exports rose from 9.6% to 12.3%. It is expected that this year they will reach 14% of GDP and amount to $2.1 trillion. In fact as a percent of GDP, exports have been rising for the most part of the past two decades, driven first by the NAFTA treaty, signed January 1, 1994, second by a weak dollar, which characterized both the Bush and Obama Administrations, and more recently by some trends now coming into play.

Three factors – certainly more fundamental than relying on a cheap dollar – are influencing the renaissance of manufacturing, which should allow exports to continue to rise as a percent of our GDP: labor cost differentials between the U.S. and emerging countries, “smart” machines and, perhaps most importantly, an abundance of cheap natural gas, most of which is embedded in shale.

According to work done by the folks at ISI, unit labor costs in the U.S. declined 3% between 1980 and 2010, while those in Germany rose 88 percent. The Boston Consulting group has determined that, adjusted for productivity, wage rates in Shanghai are only about 30% percent cheaper than in the U.S. Certainly China has lower labor rates in their western provinces, but productivity is less positive in those regions. The point being that over that the last few years the great advantage emerging economies had over U.S. in terms of labor rates is beginning to diminish. For example, ISI notes that in 2000 average wages in China were $0.50 per hour. Today they are $3.50. Inflation, in countries like Brazil, is damaging their labor-cost advantage.

In the May/June 2012 issue of The American Interest, Tyler Cowen spoke of three forces that will allow America to again become the world’s leading exporter. (We are now third, behind China and Germany.) The forces he cited were artificial intelligence, cheap sources of energy and demand from emerging countries. Anybody who has recently visited a factory floor realizes how different it is from a few years ago. A small number of people are actually on the floor. Software driven machines do much of the work. Mr. Cowen wrote: “The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess.” A manufacturing survey conducted last November indicated that almost one fifth of companies surveyed claimed to have brought production back from a “low-cost” country. In-sourcing may well replace the outsourcing of the past several years, as “smart” machines continue to be installed and as transportation costs from emerging nations imperils their competitive advantage.

Third, and the most important part of the story, America (and Canada) has an abundance of fossil fuels. Utilizing unconventional techniques such as deep-water drilling in the Gulf of Mexico, the tar sands in Canada and shale oil and shale gas in the U.S. could convert the U.S. from an importer of energy to an exporter over the next several years. (The Canadian tar sands are the principal reason behind the urgency of the Keystone Pipeline.) Over the past five years, North America has become the fastest growing source of oil and gas in the world. Estimates of recoverable oil and gas in the U.S. amount to about two trillion barrels and barrels equivalent – enough, at current usage rates, to last over a hundred years. While oil prices remain near highs, the price of natural gas has tumbled in response to new found sources. The cost advantage to America’s manufacturers is astounding. Jim Motavalli, writing in last Wednesday’s New York Times: claimed: “A million B.T.U.’s of natural gas that might cost $11.00 in Europe and $14.00 in South Korea is $2.25 in the U.S.”

Lower natural gas prices have a cascading effect on manufacturing by reducing operating costs. Citigroup estimates that 3.6 million jobs could be created by 2020 thanks to a boom in energy. Besides manufacturing, electricity generation and transportation costs would be reduced. Because it is “clean” fossil fuel, natural gas should gradually replace coal-fired electric utilities. Compressed natural gas is already being used in many big city vehicles, such as busses and garbage trucks. Ford, Chrysler and General Motors are in the process of producing hybrid vehicles capable of using compressed gas, as well as gasoline. While there are only 1000 natural gas re-fueling stations in the U.S. (versus 165,000 regular gas stations), companies like Clean Energy are addressing that need.

It appears that a manufacturing resurgence is underway. It should lead to a boost in exports and a reduction of our persistent trade imbalance. It requires but one additional component – the blessing of the federal government. The Obama Administration has an opportunity to let this development unfold. But will they? Will they rein in an Environmental Protection Agency gone wild? They have essentially sounded the death knell for the coal industry. They are already bringing suits against the natural gas companies for contaminating ground water. Obviously that is something the industry must guard against, but hydraulic fracking has been around for sixty-five years, and most of the shale is thousands of feet below the water tables and reservoirs. Shale gas in the Barnett, Haynesville and Marcellus regions are between 5000 and 12,000 feet below ground. Most ground water and aquifers are less than 1000 feet below the earth’s surface.

Our nation is burdened with debt and deficits that are out of control. The President has been unserious in dealing with it. (His 2012 budget that he submitted to Congress was turned down in the Senate 97-0 and in the House 414-0.) Even an optimist speaks in terms of decades when it comes to solutions. This noose, left alone, will surely strangle us. Neither side of the aisle has demonstrated they can be trusted to handle the tax dollars we provide them in a fiduciary manner. The best – I say the only – way out is through encouraging economic growth by unfettering the private sector. Fate has placed us in an enviable position in terms of natural resources. Ideology should be put aside. The situation is too serious. We shall see if our government encourages this revolution, or squelches it.

Friday, April 13, 2012

“Forewarned is Forearmed”

Sydney M. Williams

Thought of the Day
“Forewarned is Forearmed”
April 13, 2012

The biggest problem with Dodd-Frank is that it protects those who caused the credit collapse – consumers who borrowed more than they should, banks and government employees, like Senator Chris Dodd and Representative Barney Frank – but not its victims, the taxpayers. The reasons are straightforward: populist politics garner votes, banks provide funds for campaigns and who wants to blame themselves? Taxpayers, increasingly, are left without representation. In today’s world, most members of Congress serve without limit in “safe” districts. And government spends money (consider the Obama’s vacations, Charlie Rangel’s beach villa, or the GSA’s weekend in Las Vegas!) with little respect for its source.

While the origin of the credit meltdown has many fathers, regulation should be designed to protect taxpayers against a future occurrence, not to shelter those who strayed. How many of us, as children, were warned not to touch a hot stove? Like many, I learned the hard way! Without fear of punishment, what prevents a consumer from taking on more debt than is affordable, or what prevents a bank from trading risky securities for its own account? TARP (taxpayers) bailed out the biggest banks, including the sanctimonious Goldman Sachs and the equally supercilious J.P. Morgan Chase.

Two recent examples serve to make the point of taxpayers continuing to be at risk: Since 2005, no students’ loans have been dischargeable in bankruptcy. While that put the onus on student borrowers, it allowed lenders to offer lower interest rates. Student loans now exceed a trillion dollars, more than credit card debt. Last year three Democratic Senators joined four Democratic Representatives in introducing legislation that would restore the bankruptcy law as it pertains to privately issued student loans. Under the proposal, federal loans would continue to be protected, as they have been since 1978. The consequences of such a bill are obvious. Private lenders, faced with the possibility that their loans would be discharged in bankruptcy, would be forced to re-price those loans, effectively putting them out of business; that would leave student loans the monopoly of the federal government.

Perhaps student loans should be dischargeable in bankruptcy? That is a debate worth having, keeping in mind, it is our – the taxpayers – money. But with government remaining in the business, the benefits of bankruptcy – greater scrutiny on the part of lenders, pressure on colleges to keep costs down, and the ability to discharge an onerous debt in the case of severe financial plight – would be lost, as private lenders would be forced out of business. Given the exorbitant price of a college education, delinquencies (if not defaults) would persist, with the extra costs borne by taxpayers, not the students. The hot stove theory would not apply.

The second example relates to banks, with the derivative positions built by Bruno Iksil of J.P. Morgan Chase serving as an exemplary case. Mr. Iksil is known as the “London whale” for the size of his positions, estimated to be $350 billion at the end of last year. To put that number in perspective, on December 31, 2011 the bank’s total assets were $2.27 trillion and shareholders equity was $183.57 billion. Mr. Iksil’s positions were roughly twice shareholder’s equity and represented about 15% of total assets. At issue: were the positions hedges, or was he speculating? Jamie Dimon, who has been a vociferous foe of Dodd-Frank and the Volcker Rule that prohibits a bank trading for its own account, claims that the trades were part of a hedging strategy. The debate, or argument, highlights a flaw in the Volcker Rule – differentiating between the two – hedging and speculating. In Wednesday’s Wall Street Journal, Peter Wallinson of the American Enterprise Institute made an eloquent and convincing argument as to why the Volcker Rule is flawed. In testimony before Congress, when asked to define the line between hedging and speculating, Mr. Volcker was unable to do so. He responded that it’s like pornography. “You know it when you see it.” That may be true for old time bankers, but, as Mr. Wallinson notes, it won’t work for bank lawyers.

Since Dodd-Frank went into effect, big banks have become even bigger. At the time of the crisis, three and a half years ago, the ten largest banks controlled 55% of all bank assets. Today, the ten largest banks control 77% of all assets. The risk of ‘too big to fail’ still exists and, as Dallas Federal Reserve President Richard Fisher has been speaking out, the risks today are larger than ever. The only answer, apart from nationalizing the banking industry (which would only heighten the risk to all of us), is to curtail their size. The simplest way, it seems to me, would be to reinstate Glass-Steagall.

Every dime the government spends, whether it is on a boondoggle for GSA employees, a vacation for the first lady, building a bridge, or educating a child comes from taxpayers. The American people, in general, are enormously generous, rarely questioning the wisdom of any expense, regardless of how frivolous. But the problem is that we are becoming a single nation divided between those who pay federal income taxes and those who do not – providers and takers. Roger Ainsley once said he could see the country split between a government party and a freedom party. Currently, about half the citizens of the country pay no federal income taxes. Of the half that do, a mere five percent pay more than half of all federal income taxes. When the nation was formed, a voting requirement was ownership of property. No one wants to return to such feudal prerequisites, but neither should we have system where those who pay no federal income tax determine how tax dollars, provided by the other half, are spent. That becomes a road to Athens.

Three and a half years after the near collapse of the credit system, the lessons of that time seemed not to have been learned. When I think back on those harrowing days, my spine tingles. Saving the system, during the fall of 2008, was government at its best. (Of course, government at its worst, had been part of the cause.) While Mr. Obama talks about the terrible situation he inherited, it would have been far worse had not the Bush administration responded the way they did in September and October of 2008. Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke saved the day, with an assist from Tim Geithner, then President of the N.Y. Fed. By the end of December of that year credit markets, while not normal, were no longer in panic stage.

Both Goldman Sachs and J/P. Morgan Chase weathered the storm and are today bigger and stronger than ever. But the arrogance of their leaders is incredible. Had it not been for the Fed and the Treasury, acting in concert as they did, there is every reason to believe that neither bank would have survived. Instead of expressing appreciation, or contrition, both have decided that bigger is still better. Whatever gains will be made will be theirs. The risk falls on our shoulders – the taxpayers. Dodd-Frank has not protected those who underwrote the liabilities of those who created the crisis in the first place. Forewarned is forearmed.

Tuesday, April 10, 2012

“Is American Decline Inevitable?”

Sydney M. Williams

Thought of the Day
“Is American Decline Inevitable?”
April 10, 2012

The financial and credit collapse of 2008 has been equated to the fall of the Wall in 1989, in that the latter led to the end of Communism, while the former is seen by some as a precursor to the decline of capitalism and America in particular. It was the former that prompted Rahm Emmanuel to declaim: “A crisis is a terrible thing to waste.” Twenty-three years ago Francis Fukuama wrote that history had ended with the victory of economic and political liberalism over communism; history continues to evolve, and always will.

The rise of a mercantilist China is seen by some proponents of American declinism as the wave of the future. By some, it seems preferable to the harshness of capitalism, with what are claimed its financial disruptions, wealth and income disparities, high unemployment and polarized politics. In part, this represents a failure of the press to report the cronyism in China. In part it reflects ignorance of our country. No society has ever allowed so many to participate in the fruits of economic growth, as has America. No society is completely fair, nor would we want it to be. Disparities in abilities and desire translate into differences in wealth and income. Seven of the top ten on the Forbes 400 hundred list come from countries other than America. The desire to succeed knows no borders. The Oligarchs of Russia have nothing on the new Mandarins of China.

Two major factors caused enormous change around the world in a relatively short period of time. Capitalism bested communism and the internet revolutionized communication. Liberalism opened minds and encouraged free trade. The internet permitted the spread of ideas, allowing competition to become global – not only in goods and services, but in people. While the U.S. retains more than half of the world’s top universities, the competition has become more intense. According to the U.S. Census, there are about six million high school seniors. That number can be multiplied by 20 to determine approximately how many young people globally are reaching maturity each year. The competition is becoming increasingly intense. One advantage the U.S. has is that by 2020 it is estimated that America will be younger than China.

There are those that complain that these factors have resulted in laissez-faire economics running wild. There is some truth to that allegation. A few smart, creative, adaptable and aspirant individuals have been able to make millions of dollars, while millions of people, less able or less ambitious, have found the adjustment difficult. It was curious and ironic for President Obama to accuse Representative Paul Ryan’s budget as “thinly veiled social Darwinism.” It was curious in the sense that technology, liberalism and globalization have served to release a sense of natural selection, not in a racist sense, but in the concept that the best people, with the most innovative ideas, will challenge the status quo. It was ironic, in that Mr. Obama, who generally looks upon his opponents as relics of the past, is suggesting they are carriers of the future.

Social Darwinism does not fit with those, like Mr. Obama, who believe government supersedes the individual. Richard Hofstadter, generally considered the author of the term, wrote that “attempts to reform social processes were efforts to remedy the irremediable, that they interfered with the wisdom of nature, that they could lead to degeneration.” While some critics took the President’s use of the term as calling Paul Ryan a racist, I see it more as a part of the most important debate of our age – whether power devolves to the state or the individual.

The effects of these seismic shifts have been notable, benefitting the talented, the educated and the flexible. These shifts have widened the income and wealth gaps. But these gaps are often ephemeral. Success today does not guarantee success tomorrow. For example, three companies dominated the cellular phone business five years ago – Research in Motion (RIM), Nokia and Motorola. Combined, they accounted for 64% of the industry. Today, two companies – Apple and Samsung – dominate the industry. In 2008, electronic books accounted for 0.6% of total trade book sales; in 2011 they represented 18 percent. In October 2008, 8,000 apps were available for mobile phones; today there are more than a million. Facebook users rose from 10 million in 2006 to 800 million last year. In this morning’s Wall Street Journal, there is a story of Instagram, a mobile app company which was sold to Facebook for a billion dollars eighteen months after it was launched. The point is that in an ever changing world there are literally millions of opportunities for the creative, entrepreneurial individual.

Unions did a great job of protecting workers in a static world, and there are those who pine for a past when the UAW provided life-long employment with high salaries and great benefits to hundreds of thousands of men and women. But we live in a dynamic world of constant change, filled with risks and opportunities; thus the union’s relevance has been lessened – everywhere, that is, except in government where unions have undermined creativity and aspiration. Governments attempt at harnessing this creative spirit will prove futile at best and at worse will ensure America’s inevitable decline. Consider the differences between the development of solar power and natural gas. Which energy source is most likely to play the more important role in our economy over the next ten or twenty years? Which is being supported by government and which is being funded by private capital?

Government can, though, help the process. The single most critical sector for any individual’s future success is education. Too many public schools in our country are run for the teachers and administrators and not for the students. That must change, in order that opportunities become a viable option to the youth of our nation. Government can encourage small businesses through programs such as the JOBS Act (Jumpstart Our Business Startups Act.) Through the tax code, it can encourage investment. If one wants to call this social Darwinism, so be it. To me it looks like an exciting, meritocratic world filled with opportunities. Barron’s had a fascinating article in this past weekend’s edition. They researched the four hundred highest-income taxpayers over the past seventeen years. Only four (one percent) were on the list for all seventeen years. Just 27% of the filers made the list more than once and just 15% more than twice. Contrary to what Mr. Obama and the mainstream press would have us believe, the U.S. has not created a new class of moneyed aristocracy. The internet and the rise of liberal politics have unleashed the power of the creative individual. People, money and ideas are in flux, just as they should be.

Balanced rules and regulation are always necessary and we can debate their extent and their stringency. We can only function as a nation of laws; government must aid, not inhibit, development. A government that creates dependency is one that ensures that the mass of the people will remain uneducated and poor. No two people are the same. There is no way of ensuring parity or fairness in outcomes, but we must allow equality of opportunity. Should we substitute the collectivism of big government for the creativity of the individual, the skeptics will prove prescient. On the other hand, should American exceptionalism be permitted to thrive, talk of declinism will be remitted to the dustbins of history.

Monday, April 9, 2012

“A Vendetta Against Big Oil?”

Sydney M. Williams

Thought of the Day
“A Vendetta Against Big Oil?”
April 9, 2012

Big business is often deserving of the criticism it receives. Too often, managements view shareholders as pesky, but necessary, nuisances. A little more than a year ago (January 10, 2011) I wrote a piece, “CEO Salaries, Shareholder Returns and the Future of Our Nation”, in which I lamented the fixation of government, corporate management and traders on the short term; the hedonistic attitude of managements, as they consider public companies to be private banks, and the negative consequences for shareholders, the unsung victims of today’s capital markets.

However, having written that, the Administration’s attack on the oil, gas and coal industries is deserving of censure. It is not only deceptive, but should Mr. Obama’s actions prove successful (environmentally and tax-wise), they will cause the price of everything from fuel to food to clothing to rise. The beneficiaries might be a few wealthy environmentalists and favored “green” energy companies; the losers will be the American people.

All politicians twist words and phrases to suit their purposes. But this President has gone to extra lengths. When Mr. Obama said that the Affordable Care Act was passed by a “strong majority”, he knew he was fibbing. When he said that a Supreme Court decision overturning any part of that bill would be “unprecedented” and “extraordinary”, he knew he was telling a whopper. A lie is defined as making a statement that one knows to be false, with the intent to deceive. When Mr. Obama states that “America only has two percent of the world’s oil,” as he did in Miami on February 23rd, mainstream media reported it as true; others used euphemisms – he was “stretching” or “exaggerating” the truth, or he was “fabricating” a story. C.S. Lewis once wrote that when writing, authors should “always prefer the plain direct word to the long, vague one.” The President was lying. His Energy Information Administration has stated that proven reserves is an inappropriate means of measuring total resource availability.

For example, the U.S. Geological Survey estimates that unconventional U.S. oil shale resources hold 2.6 trillion barrels of oil, of which one trillion barrels are recoverable, given today’s prices and technology. One trillion barrels is four times Saudi Arabia’s proven reserves. Additionally it is estimated that Recoverable Reserves in Alaska total 35 billion barrels and another 29 billion exist offshore. Construction of the Keystone XL Pipeline (for which Mr. Obama refuses to allow construction) would permit access to Alberta’s tar sands, estimated to be one trillion barrels. At the current rate of consumption in the U.S. – seven billion barrels per annum – that suggests a life expectancy of more than 150 years. For more than forty years, since the first Arab oil embargo, every President has invested in alternative energy projects – including the despised Bush II. The difference about this President is his arrogant disregard to today’s realities and needs, and his inclination to cast blame for any woes on someone else.

The President speaks of domestic oil production being up since he took office three years ago, which it is. But, according to the Congressional Research Service, 96 percent of the increase in domestic oil production since 2007 has occurred on nonfederal lands where the federal government plays little or no role. The federal government owns or completely controls almost 2.5 billion acres of land and offshore zones. According to Mr. Bob Abbey of the Bureau of Land Management, oil production is actually down 14 percent on federal property and down 17 percent offshore from a year ago. Mr. Obama is deliberately “bending the truth” in a deliberate attempt to deceive the American public. C.S. Lewis, however, would just say the President is lying.

At his speech in Miami, on February 23rd, the President used the weight of his office, his exceptional rhetorical skills and the hyperbole for which he is well known, to go on the offence against rising gas prices. He accused Republicans of having a single plan, with three parts – drill, drill, drill – and the oil companies of gouging taxpayer, while earning “excessive” or “windfall” profits. There are many ways to measure the profitability of companies. One method is net profit margins. On that basis, the major oil companies rank 114th, just below generic drugs and catalogue & mail order houses, with net margins of 6.2 percent – hardly gouging! While Exxon-Mobil is the most profitable U.S. company in terms of sheer numbers, neither it nor any other oil company rank in the top 50 in terms of profitability, as measured by return on shareholder equity, according to CNN Money.

Regardless, the President is determined to punish the industry. He has proposed eliminating special tax breaks for the domestic fossil fuel industry. Among those proposals are: Repeal percentage depletion for oil and natural gas wells ($12.6 billion); Repeal expensing of intangible drilling costs for oil and gas ($12.9 billion); Increase amortization period for geological and geophysical amortization period for independent producers to seven years ($1.4 billion.) To put these numbers in perspective, according to the Energy Information Administration, the oil industry in 2009 – the latest year for which numbers are available – paid $35.9 billion in corporate income taxes. When the President gets on his high horse and claims that the oil companies (like the wealthy) are not paying their “fair share”, keep in mind that the Tax Foundation estimates that between 1981 and 2008 oil companies sent more money to Washington and State Capitals than they earned in profits for shareholders. As well, when Mr. Obama talks about the “subsidies” that oil companies receive, these are not cash handouts like those that go “green” companies, like Solyndra, which costs taxpayers half a billion dollars in actual cost outlays. The subsidies are deductions from taxes that cover costs of doing business deductions generally available to most industries.

We expect our politicians to exaggerate when in campaign mode, a condition of Mr. Obama for the last three years. But, we also deserve a frank and honest discussion, something the President finds elusive. Joseph Goebbels, Hitler’s master propagandist famously observed, “If you repeat a lie often enough, it becomes the truth.” Indicative of the success of the President’s strategy was the latest IBD/TIPP poll regarding responsibility for rising gasoline prices: 28% blame price-gauging oil companies, 18% blame “speculators” on Wall Street; just 13% placed the blame on a “lack of domestic production.” While the President finds the poll vindication of his strategy, achievement of that goal does not justify it.

“Big oil” makes a convenient target. The industry and its components are large, and largely foreign to those of us living on one of the two coats; its products are ones that most everybody uses every day; the price of its most visible product (gasoline) has been rising recently; and we rely on imports for about half our needs. Energy Secretary Steven Chu’s unwitting comment of three years ago – “We have to figure out how to boost the price of gasoline to the level’s in Europe” – has proven to be an inconvenient embarrassment of policy decisions that the President cannot walk away from; so he has resorted to blaming the big oil companies, in a deliberate attempt to deceive the American people.

Mr. Obama is not the only public official to stretch the truth – in fact, finding an honest person in Washington would create full time employment for a bunch of Diogenes – but he is the President, and we the people deserve better. And, if we begin referring to these politicians as the liars they are, rather than using socially acceptable euphemisms, the sooner the public might demand honesty and civility.

As I mentioned at the start, I am not a big fan of many large public companies for the reasons I mentioned and I worry about collusion between big government and big business. But I am less a fan of politicians who demonize an industry for personal gain, with little regard to the consequences of the people. Has the President been committing a vendetta against big oil? It is hard to argue otherwise.

“’Happy Planet Index’ – Are These Guys for Real?”

Sydney M. Williams

Thought of the Day
“’Happy Planet Index’ – Are These Guys for Real?”
April 3, 2012

While silliness is not the exclusive purview of governments, a lot of our tax dollars go to projects that would astound the Founders and which defy common sense…and I suspect would surprise most clear-thinking individuals here in the good old U.S.A., as well as sensible people in other parts of the world.

As a manifestation that too many people have too much time on their hands, the New Economics Foundation in July 2006 introduced the Happy Planet Index (HPI) as a measurement to challenge such well-established indices of countries’ development, such as GDP.

Under that index countries are ranked according to an average of a subjective measurement of life satisfaction, life expectancy at birth and ecological footprint per capita. The absurdity of their efforts can be seen in the rankings, which had, as of 2009, Costa Rica, the Dominican Republic and Jamaica heading the list of “happiest” countries. The people of Cuba (ranked number 7) might be surprised to learn that they are far happier than those in the country so many of their compatriots have died trying to reach, the United States (ranked number 114). Haiti (number 42) is being visited with an outbreak of Cholera; yet their people are deemed happier than those in Germany (51), Switzerland (52), Sweden (53) or the UK (74).

The hypocrisy, of course, lies in the belief that government can affect and measure happiness – a belief that belies the findings of Arthur Brooks who in 2008 published a survey and analysis of U.S. happiness: Gross National Happiness: Why Happiness Matters – And How We Can Get More of It. His findings were (and are) controversial, but to me seem commonsensical. Religious people of all beliefs are much happier than secularists. Couples with children are happier than those without. Balancing personal freedom with societal order brings happiness. Conservatives were twice as likely to call themselves “very happy” than liberals. Mr. Brooks writes that having a “meaning” to one’s life, what Aristotle called eudaimonia, is critical to happiness.

Not wanting to be on the bottom of any list, no matter how ludicrous, the U.S. Department of Health and Human Services has convened a panel of experts to try to define reliable measures of “subjective well-being,” a measure of happiness, an effort welcomed by our dear leader, President Obama. The study will consume millions of our tax dollars. Meanwhile, much of the infrastructure of our highways and bridges are rusting. Veterans are returning from wars in Iraq and Afghanistan to face indifference at home and benefit cuts from a not-very-thankful government. And unemployment remains above eight percent. But government knows what’s best for us; so the hell with the consequences, we are going to be happy no matter how much it hurts or what it costs!

The concept of quantifying happiness goes back to 1972 when King Jigme Singye Wangchuck of Bhutan pledged to measure his country’s progress not in GDP, but in “gross national happiness”. The idea was to commit to a leadership that could be trusted, that would respect one’s cultural heritage, to avoid being swallowed up by the “menacing forces” of globalization and to not grow the economy at the expense of the people.

The scorecard? Forty years on the authoritarian government of Bhutan “ethnically cleansed” those of their countrymen not considered pure – mostly those of Nepalese origin. The country ranks 111th in terms of “freedom”, between Tanzania and Vanuatu, in the category “Mostly Unfree”, and number 76, between Brazil and Montenegro, in terms of GDP per capita. Nevertheless, Bhutan shows up number 17 on the HPI, ahead of 126 other countries, including every western country. Apparently a dictatorial regime and killing one’s countrymen in the name of ethnic purity enhances happiness!

Moving from the sublime to the ridiculous, yesterday the Bhutanese Prime Minister H.E. Jigmi Y. Thinley convened a summit at the UN, entitled “Wellbeing and Happiness: Defining a New Economic Paradigm.” “In short,” as Lisa Napoli naively wrote in last weekend’s Forbes, “there’s more to life than amassing money. And the future of the planet depends on changing the way we think.” High sounding words, but one can rest assured that, while the skies of Bhutan’s mountainous skies may be blue and their rivers run cold and clear, the leaders of Bhutan have amassed riches, but the masses live in poverty.

The President of Costa Rica, Laura Chinchilla, will deliver the keynote address at the UN, as her country is “heralded as happy” for abolishing its military and maintaining its environment, and is ranked number one on the Happy Planet Index. However, Costa Rica, for those keeping track, is ranked at 44, in terms of freedom, between Macedonia and Colombia, and in terms of world GDP per capita, Costa Rica is number 76 between Brazil and Montenegro.

With images of smiling, healthy Bhutanese faces on the eastern slopes of the Himalayas, or laughing Costa Ricans dancing through Rain Forests, it is surprising that Americans are not clamoring to emigrate. Instead, why are Bhutanese, Costa Ricans, Cubans and Haitians trying to come here? Might it have something to do with freedom, opportunity and the prospect for happiness?

Our Declaration of Independence states that the people are endowed by their Creator with certain unalienable rights, one of which is the pursuit of happiness. According to that document, it is the “Creator”, not government that grants these rights “Unalienable” is defined as something that is incapable of being repudiated or transferred, which means they are not government’s responsibility. People have long debated the exact meaning of happiness as used in the Declaration and, to the best of my knowledge, nobody has come up with an answer that satisfies all parties. Its origins date back to Aristotle and John Locke who, in a 1690 essay entitled “Concerning Human Industry”, wrote, “The necessity of pursuing happiness is the foundation of liberty.”

The best definition I know suggests that the pursuit of happiness is the right to pursue any lawful business or vocation, in any manner, that does not violate the equal rights of others. At its essence, it describes the right of people to be free.

Despite the inability of students and philosophers to quantitatively define happiness, Health and Human Services Secretary Kathleen Sibelius and the UN have concluded they will be able to apply analytics to measure what surely is a qualitative state of mind. They are not alone. British Prime Minister, David Cameron, who should know better, has embraced the idea of assessing happiness through surveys, with such incisive questions as, “Overall, how happy did you feel yesterday?” French President Nicholas Sarkozy, in 2008, launched a commission which opined that the “time is right for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being.” Once “measured”, policies will be implemented according to government’s definition of happiness – and an element of individual freedom will be lost.

Certainly, it is true that happiness does not stem from materialism alone. The most important element is a moral component. If one adds value to one’s family, co-workers and friends – if one makes them happy – one is likely to be a happy person. In truth happiness is indefinable. It means different things to different people, but people who are happy know it, just as those who are unhappy also know it. For Mrs. Bennett, happiness was getting her five daughters married. “Happiness,” wrote Maxim Gorky, “always looks small while you hold it in your hands, but let it go, and you learn at once how big and precious it is.”

If government feels that happiness is worth quantifying and measuring, it suggests they have plans to make us all happy. But government cannot impose or mandate happiness. It can, though, provide the conditions that let happiness thrive. That means a society that recognizes that all citizens are created equal, a society that functions under the rule of law, that safeguards its people and that offers equality of opportunity and one that keeps its people free – to succeed or fail. “Men,” George Orwell wrote, “can only be happy when they do not assume that the object of life is happiness.” A Happy Planet Index is a distraction, and a government that believes they can foster happiness is a dangerous one.

Monday, April 2, 2012

“The Market – Like Goldilocks’ Porridge, Neither too Hot, Nor too Cold”

Sydney M. Williams

Thought of the Day
“The Market – Like Goldilocks’ Porridge, Neither too Hot, Nor too Cold”
April 2, 2012

There is risk in today’s market. But there always is.

The 12% gain for the S&P 500 represents that indices best gain for a first quarter since 1998. The gain in NASDAQ’s first quarter (+18.7%) was the strongest since 1991. As the old ad for Virginia Slims went, “You’ve come a long way, baby!”

Since the lows were reached in March of 2009, the S&P 500 has gained 113%, or a CAGR of 28.4%, making the market look expensive on that metric. However, that rise was off of a very low base. When one takes a longer horizon of ten years, the same index has compounded at a nominal rate of 2.7%, making stocks – again, using that metric – appear inexpensive. Going back further, twenty years, the S&P 500 compounded at 6.5%, suggesting the porridge is neither too hot nor too cold, but just about right. The twenty-year numbers represent one very strong decade, followed by a weak one. As a believer in trends reverting to the mean, it is difficult to get overly excited about equity prices, but neither should one be unduly negative.

At 13.7X a consensus earnings estimate of $103 for 2012, the S&P 500’s valuation, given interest rates, looks reasonable, but not exceptionally appealing if rates start backing up, as I suspect they will over the next several years. (However, between 1945 to 1968 interest rates rose modestly, and stocks did very well.) Should the economy continue to gradually improve, as I believe it will, and if corporations persist in improving productivity, as they should, the market’s future gains should approximate corporations increase in earnings. However, following the snap-back in earnings after the recession, the rate of gain should moderate.

In comparison to other assets, stocks, despite their move, appear attractive. U.S. Treasuries have been correcting, but yields still appear too low relative to inflation expectations. Spreads between Investment Grade Corporates and Treasuries have narrowed from 411 basis points on December 31, 2008 to 167 basis points today, suggesting that the bond rally may be nearing its apex. The spread between Corporates and high yield bonds, over the same time, has narrowed from 1108 basis points to 325 basis points. It may not go higher, but gold is four times higher than it was ten years ago, indicating that there are a lot of believers in the metal.

There are some statistics that are eye-catching. Cash on corporate balance sheets approximates two trillion dollars (including cash held overseas), but almost one quarter of that is held by ten companies, with three companies – Apple, Microsoft and Cisco – accounting for just under $200 billion, or ten percent of that cash. Corporate pretax profits now account for 12.5% of GDP, the largest share since 1950, while wages and salaries account for the smallest share of GDP (54.9%) since 1955. According to the Financial Times, capital expenditures are surpassed by internally generated cash flows at a quarterly annualized rate of $200 billion. However, the FT quotes RBC in noting that corporate buybacks and dividends combined are now outpacing earnings.

Offsetting those somewhat Panglossian statistics, however, is the uncertainty surrounding both the Affordable Care Act and the fate of the Bush tax cuts. As we all know, the market does not like uncertainty, despite that being a constant condition whenever one is contemplating the future. Nevertheless, these two issues loom large. The good news is that both will be settled within nine months; the bad news is that we don’t know what the outcome will be. I would argue, though, that to the market, in the near term, resolution is more important than the outcome.

The S&P 500 closed at 1408.47 for the quarter, and has been flirting with the 1400 level for the past two weeks. Twice, in the past thirteen years, that index has closed above 1400. The first time was in July 1999 and the second time occurred in November 2006. In both cases, the index continued to do well for about a year. It peaked in March 2000 at 1553.11 and in October 2007 at 1576.09. Perhaps the lyrics to the song will be auspicious: “Third time lucky and you’ve arrived.”. On the other hand, we know it took Robert the Bruce’s spider seven attempts to attach its web.

Morgan Stanley had a comment on the market that Jeff Somers discussed in his column in Sunday’s New York Times. As a small fish, it’s always interesting to read what the “big guys” are thinking. They conclude that “macro conditions are vastly different than in 2006 (to which I say ’Duh!’) and largely worse,” to which I ask ‘Really?’ They point out that GDP has been weaker and that inflation has been stronger today than in 2006. They point out that unemployment is higher today, “shockingly steep” is the way they put it, and that the trajectory of profit growth is flattening. They note that corporate balance sheets are in generally better shape, but that the Federal Reserve’s balance sheet has tripled to $3 trillion. However, they neglected to point out that in 2006-2007 we were on the cusp of the largest credit crisis the monetary system had confronted since 1907 and about to enter the worst recession since the Great Depression. Retrospect tells us that there was a good reason for the market to fall sharply from 2007 to 2009. Nobody knows what the next five years will bring, but I wager it will not be as bad as what we experienced.

Having written that, there is a lot that worries me. The size of government debt is one, and the decision by the Fed to keep rates abnormally low permits spenders in Congress to not have to face the full consequences of their prodigal ways. Combined, according to Bloomberg, the fifty states have promised their employees retirement healthcare benefits of $627 billion, of which only four percent is funded. Unfunded state and municipal pension liabilities amount to as much as $4 trillion. For the last ten years, the U.S. has pursued a policy of dollar depreciation. During that time the U.S. Dollar Index has dropped 31.6%. The Middle East is in turmoil, but when has it not been? Many have counted on China to be the engine of global growth, and they seem to be struggling. Europe reflects the failure of socialism, but there is nothing new in that. The President seems determined to expand the size of government relative to GDP, with the result being reduced freedom and opportunities for individuals. But none of these concerns are new. The market has been studying them for years. The negatives are, as Laszlo Birinyi, has said, as prominent as the nose on one’s face – Mr. Birinyi’s Cyrano principle.

Thirteen years ago (the first time the S&P 500 was in this realm), the markets were completing an eighteen year period during which S&P 500 compounded at 16.3% on a price basis – the largest gain for that period of time in the history of the stock exchange. What we have been doing is digesting the extraordinary gains of the past. The python swallowed a horse; he has stopped eating; the question is, how far along the python’s alimentary canal has the horse traveled?

I conclude where I began. The market has enjoyed a good three years. Unfortunately money flows into equity mutual funds suggest a lot of people missed the rally, as flows have been negative and continue to be so into March. In contrast, flows into bonds have been positive. Markets, in their diabolical fashion, have a tendency to do what is inconvenient and least attractive to the most people. Equity investors should not be frightened by continued outflows, in fact, that should be placed on the positive side of the ledger, as they weigh options. Consumers, very recently, have increased spending at a rate higher than incomes, diminishing savings. That should go on the negative side. Keep in mind, this has been a highly correlated market, which should provide opportunities to stock pickers. Valuations, in general, look ok to me – not great, but not terrible – a lot like the porridge Goldilocks chose, just about right.