Monday, September 30, 2013

"Twenty-one Hours with Ted Cruz"

Sydney M. Williams

                                                           Thought of the Day
                                               “Twenty-one Hours with Ted Cruz”
September 30, 2013

Senator Ted Cruz of Texas may not have advanced the cause of defunding ObamaCare on last Tuesday night and Wednesday morning, with his rhetorically fluent arguments on the floor of the Senate (and his still standing at the end), but he did serve to highlight a critical issue: The problem is not just ObamaCare; it is the increasing encroachment of the state into our daily lives. ObamaCare is only its latest (and potentially most significant) manifestation. It is the deliberate (and deceptive) focus on the trees by much of the Press and most politicians that prevent us from seeing the forest. In 1992, the late Robert Bartley, longtime editor of the Wall Street Journal, warned that it was “absolutely true that in the long term we will be unable to control government expenditures if the government keeps assuming new responsibilities.”

For decades, the country has been drifting inexorably to the Left. President Obama, in 2008, promised to fundamentally transform the country. He has not. What he has done is simply sped up a process that has been underway since the 1930s. To “fundamentally transform” the country we need to exit the highway we are on and take a different route, one towards less dependency, more freedom and greater personal responsibility. That is the route toward which Mr. Cruz is pointing. Keep in mind, less government means less power in Washington, which is why Mr. Cruz’s threat is so inimical to almost all of those who live and work within the Beltway.

It is true that federal spending as a share of GDP has declined from the 26.5% in the second quarter of 2009 to 23.5% in 2012. It is estimated to fall further to 23% this year. When speaking to fiscally conservative Democrats and Independents, Mr. Obama has brayed that this has been the most rapid drop in forty years. What he doesn’t say is that the 26.5% was by far the highest level of spending in the post-War period, or that sequester cuts and other caps on spending, which have led to deficit reductions, were largely due to Republican Congressional victories in 2010. If the decline in government expenditures persists that should lead to an improvement in the economy, which would generate more tax revenues, thereby lowering the deficit even further. The operational word, of course, is “if.” And it assumes that ObamaCare is less expensive than most experts now anticipate. The Congressional Budget Office (CBO), for example, calculates that ObamaCare alone will add $1 trillion to spending over the next decade.

Given the vitriol in Washington, it is impossible to have the kind of reasoned debate needed that would allow Americans to fully understand the consequences of the choices they have. Opinions are held too strongly and no respect or consideration is given by either side – one has only to read the President’s comments at Prince George Community College on Thursday, addressed to what the New York Times called a “friendly audience.” Mr. Obama’s ego was no doubt flattered by the accolades he received from his young and adoring audience. The Times wrote that Mr. Obama’s voice was “laced with scorn” and that he “ridiculed” his opponents, who he referred to as “billionaires who would deny help for the sick.” My guess is that the mostly middle class Tea Partiers would be surprised that the President would include them among such rarified ranks, and with many being middle-aged and older, caring for the sick is probably a daily part of their lives. Most of his opponents are average, every-day Americans who are concerned about a loss of freedom – the individual freedom that has characterized America for most of its history. They differ from the President. They believe in a government supported by the people, not a people supported by the government.

The problem with too many Washington politicians is exacerbated by the corrupting influences of the District. Men and women have long gone to serve in Congress – to right wrongs; to promote particular, perhaps idealistic, causes; but, most importantly, to represent the people of their districts. However, too many stay for the money, the power and the glory. The very fact that Congress exempted themselves from the more onerous aspects of ObamaCare is an indication of their arrogant abuse of power and a growing separation between them and those they represent. Gerrymandering, of course, has made House Congressional seats increasingly safe. Only a small number of seats are truly at risk. Senators increasingly see themselves as national figures, no longer principally tied to the needs of their individual states. Democratic Senators, no matter from which state they hail, get their campaign funds from wealthy coastal elites, Hollywood big shots, unions, big business and Wall Street. Republicans get theirs from wealthy Midwesterners, small businesses, and Wall Street. (Wall Street is largely apolitical, more interested in protecting its nest, than concerning itself with longer-term political philosophies. It is shortsighted in that regard.) The only answer to the disconnect between the people and their representatives is a Constitutional Amendment to impose term limits.

Some observers have suggested that these perennial Senators and Representatives form a new Party – the Permanent Bipartisan Fusion Party (PBFP), representing all of those who are less concerned about Constitutional matters than they are about personal survivability. These men and women label themselves as reasonable centrists, declaring those on the fringes to be whackos. They believe in leaving government largely as it is, drifting lazily downstream, but, as indicated earlier, irrevocably to the left. That is the risk Senator Cruz sees. The appeal of the PBFP to independents and centrists is that they appear as adult voices amidst squabbling kindergarteners. But there are times when one should listen to a screaming child.

For those of us who have always lived in America, it is difficult to grasp the concept that freedom is fragile – that most of the world’s people are not free, and that once gained, freedom can be easily lost. Many go to Washington with the idea that government should assume responsibility for more and more aspects of our lives, ignoring or unaware of the effect on our freedoms. With no real life experience among autocracies and little understanding of history, it is easy to be swept up under the arm of a caring government. But every time we give up some small aspect of responsibility we also surrender some aspect of our freedom. We see that recently in the expanding power of agencies, such as the EPA and HHS. Since most of us do not believe in anarchy, we recognize the trade-off of living in a society where we must obey rules, laws and customs. Even the most wild-eyed Tea-Partier (the crazies, as Mr. Obama characterized them) obeys traffic signals and pays his or her taxes. The question we should be debating, but which we apparently cannot or will not, is how much freedom are we willing to give up for increasing security, safety and comfort?

Democrats, and Mr. Obama especially, have become masters of the “blame” game. “Bush did it,” became such a commonplace phrase that it has been added to our dictionary of idioms. Republicans know that they will be blamed for any government shutdown. But, so do Democrats, which is why Mr. Obama, who is willing to negotiate with the Syrians and Iranians, has not seen fit to sit down with the opposition party. It is why Harry Reid is so arrogantly steadfast against equally tenacious Tea Partiers. Our system of government allows for majority rule, but the rights of minorities are supposed to be respected and represented. The Affordable Care Act was passed solely along Party lines. It did not receive one Republican vote. Never before in our history has a landmark piece of legislation passed without a single opposition-Party vote. Imagine the hue and cry if the tables had been reversed! The President is the only person in the Country in a position to try to reconcile the differences. Instead, he chooses to demonize and belittle his opponents, ignoring the fact that they represent a significant part of the population over which he presides.

Mr. Obama was the first President in our modern history – perhaps ever – to win a second term with a smaller percentage of both the popular and Electoral College vote. One would have expected that might have infused him with some sense of humility – that he would make an effort to reach out and try to understand why a significant cross section of the American population does not support him or his agenda. Instead, he has become more imperious, more condescending. On Friday he chastised Congress as a parent might a wayward child. “Knock it off, pass a budget and move on!” What does he mean, “Knock it off” and “move on?” Whose spending got us into this mess in the first place? Who has ignored the House and the millions of people their members represent?

Perhaps Senator Cruz was acting only in self interest – that his marathon speech would serve to help him in 2016? Perhaps? But perhaps he is legitimately concerned about the direction our Country is heading? Continuing down the path we are on will lead relentlessly and inevitably to greater dependency, more regulation and diminished freedoms.

Long-time, professional politicians of both Parties do not want to rock the boat. They are comfortable. Most of our post-War Presidents have been men of the center. The two exceptions have been Ronald Reagan and Barack Obama. (One might argue that Jimmy Carter fit that mold, but he has done more damage as an ex-President than he ever did as President.) Neither Reagan nor Obama was able to totally reconfigure the political scene, but Mr. Reagan did slow the leftward drift and Mr. Obama has accelerated it. It is possible that Senator Cruz is an instrument of change – not likely to reverse course, but at least to temper the pace. It is the forest of government encroachment that gets lost when we hear Mr. Obama, and his minions in the Press focus mainly on the trees.

Politics is the art of horse trading, but good government is based on principles, character and adherence to the law. Compromise makes little sense when the principles that created our Republic have been abandoned or compromised, or that laws get enforced depending on the whims of the President. Character, by which I mean honesty, adhering to principle, care for others and integrity, is largely absent in Washington. Our principles are embedded in the Constitution and its 27 Amendments. Should we condemn as a tantrum a principled stand? Senator Cruz is not a man of the center and he will surely not achieve the goal of defunding ObamaCare, but that does not mean that his 21 hour marathon was in vain. I suspect he was looking at the forest.

Friday, September 27, 2013

“Climate Change – Who are the Real Deniers?”

Sydney M. Williams

                                                                  Thought of the Day
                                             “Climate Change – Who are the Real Deniers?”
September 27, 2013

At some time today the United Nation’s Intergovernmental Panel on Climate Change (IPCC) will release its “fifth Assessment report.” Climatologists from around the world have spent much of the week in Stockholm debating the thirty-odd page document that will summarize the (approximately) 2000-3000 pages of scientific discussion. This widely anticipated report, like a boomerang, returns every five or so years. It brings gleeful portents of doom to those who feed on such fears both politically and financially, while upsetting “deniers.” Virtually no one takes a balanced perspective, measuring the needs of emerging nations for growth versus the desire of rich nations to live in more pleasant surroundings, or considers the whimsical and unavoidable changes in nature. Few talk to the fact that our planet is, and always has been, in continuous change – and that that is something that man cannot alter, but for which he should prepare.

Even expectations of what the report may say have polarized opponents. The Wall Street Journal suggested, for the first time since these reports began coming out in 1990, that this one will “dial back the alarm.” On the other hand, the UK’s The Guardian, wrote, “Scientists will this week issue their starkest warning yet about the mounting dangers of global warming.”

We know that the earth’s temperatures have changed radically over millions of years. Temperatures on earth can be measured, as can sea levels and the density and size of ice floes. There is no one who claims man has not altered his environment. The debate is solely about what relative impact he has had on a climate that is in constant flux.

While we do not know how life came to be or exactly how the earth was formed an estimated four billion years ago, we do know that it has warmed and cooled thousands of times over millions of years – from ice ages that produced glaciers in southern New England a mile thick, with snow and ice covering most of the planet, to temperatures of the Arctic Ocean reaching an estimated 73 degrees Fahrenheit. Both periods, understandably, were devastating to species. Nevertheless, life began, survived and has evolved. There are those who believe that the earth is still warming from the last ice age of about 20,000 years ago. Nothing happens uninterrupted, however. We know, for example, that the middle ages were warm. We also know that the end of the 18th Century and the first part of the 19th were unusually cold. Man was unlikely to have been the cause for either. There is much we do not know. We do not understand why temperatures have been constant for the last fifteen years, despite the fact that global carbon dioxide emissions were 32% higher in 2012 than in 2002. (Incidentally, during the same period emissions declined 8% in the U.S., due largely to a surge in shale gas production.)

In the life of the planet, man is a relatively recent arrival. He is the only species that has subverted nature for his own purposes. While man is criticized today for effecting climate change and damaging the environment, none of us would be alive today had not our ancestors trapped and slaughtered animals for food and clothing; cleared forests for warmth, housing and agriculture; mined the earth for minerals and energy, and diverted rivers for purposes of power and irrigation. Had his ancestors not done so, Al Gore would not have been able to fly on his private jet – which emits four times the emissions of a commercial jet – to Oslo to accept an undeserved Nobel Peace Prize for an error-filled movie, “An Inconvenient Truth.”

Unfortunately the subject of climate change has become a political football, with extremists uttering hyperboles on both sides. There are those who deny that man has had any affect, which is absurd given that global energy use is roughly 250 million barrels of oil equivalent per day, and as cities like Beijing and Mexico City become engulfed in man-induced smog. There are others, like Mr. Gore, who have made millions by inflicting fear on gullible people. While deniers are generally laughed out of the room, as “members” of the flat earth society, the latter, while equally wrong, have seized the moral high ground. With blinkered mainstream media and blindly allegiant Leftists behind him, Mr. Gore became a co-recipient of the 2007 Nobel Peace Prize. How many people know, though, that Mr. Gore has been the only recipient of the Nobel Prize whose award winning work, “An Inconvenient Truth” was ruled politically biased and negated by nine scientific errors by the British High Court prior to his receiving the prize? The other recipient that year, the IPCC, was also criticized for exaggeration.

The real damage caused by the bickering over past IPCC reports is that people are made to believe that if they recycle their (less than 20 ounce) soft drink containers, purchase a $75,000 Tesla Model S, and install solar panels the planet will heal. There is, moreover, the problem of disposing of used batteries and the cost of solar panels. Additionally, “feel-good” acts by (mostly) the wealthy divert attention from the needs of approximately 2.3 billion poverty-stricken people in emerging countries who have need for cheap energy. Membership in the flat earth society is not limited to deniers. It also for those who believe that man should be able to keep the planet from changing.

Robert Bryce, writing in Bloomberg a few days ago, made the point that global energy cost the world $5 trillion a year. According to Bjørn Lomborg, president of the Copenhagen Consensus Center in Washington, D.C. and author of The Skeptical Environmentalists, 81% of the world’s energy comes from fossil fuels. He adds, “In 2035, in the ‘most green’ scenario, we will get 79% from fossil fuels.” Energy transitions occur, if you will pardon the pun, glacially “over decades,” as Mr. Bryce notes, “even centuries.” The United States, the world’s largest economy, has been reducing their emissions for several years – before “the One” even promised to hold back the oceans and “heal the planet.” But we cannot expect the same of the less-developed world. Mr. Bryce quoted Roger Pielke, a professor of environmental studies in Colorado: Whenever policies “focused on economic growth confront policies focused on emission reduction, it is economic growth that will win out every time.” That is a fact that Al Gore should consider, as he sits smugly in the library of his 20,000 square foot house outside of Nashville, a house that consumes twenty times more energy than the average American house. On the other hand, another former politician, relaxing in his 4,000 square foot house in Crawford, Texas, a house which uses no fossil fuels, can take satisfaction in the knowledge that he has done more to save the planet than his former political competitor ever did, even though the former became rich selling fear, while the latter never bragged about what he had done.

The climate will never stop changing. No more than could Canute hold back the tide, not even “The One” can stop nature from changing. We will never live in a static world, nor would we want to. While I am a strong believer in a clean environment, it is not about saving the planet – nature is bigger, more powerful and can be more destructive than anything man has devised. Just ask those who were in the path of Katrina or Sandy. I believe in a cleaner environment because it is more pleasant and its one we can afford, as manifested in our reductions of carbon dioxide emissions. We live better than we did. The coal dust that enveloped New York City before World War II is gone, as is the smell from the slaughter houses in Elizabeth, New Jersey. The Connecticut River is cleaner than it was 200 years ago. Garbage from New York City no longer washes up on the Jersey shore, as it did in the 1970s. We are far better off, in this regard, than we had been. It is in our nature, as we become wealthier, to do so. We cannot forget, however, that our wealth is a consequence of economic success – the faster we grow, the more affordable are luxuries, like green energy. We must also recognize that changes in energy usages are evolutionary, not revolutionary. Also, keep in mind that the transition away from coal in New York City and the cleaning up of the Connecticut River happened years before the establishment of the EPA in 1970. It is man’s nature to prefer to live a cleaner, healthier life.

If we want to see people in Asia, Africa, Eastern Europe and the Middle East live similar lives, we must be willing to accept that their economic growth will be dependent on an abundance of cheap energy. The atmosphere may get dirtier before it gets cleaner. Those that deny others the opportunity they had are the real deniers. In the meantime, we appear to be doing our part. Things happen that we cannot prevent; for that we should always be prepared. To deny nature is to be a foolish denier.

Wednesday, September 25, 2013

"Government Encroachment"

Sydney M. Williams

                                                              Thought of the Day
                                                       “Government Encroachment”
September 25. 2013

A politically correct government is transfixed, not with equality of opportunity, but with equality of outcomes. The problem with such policies is that, while they may help those on the lowest end of intelligence and aspirational scales, they hurt those at the higher end and they dumb-down the mean. In public high schools, we see the consequence in college-bound students having to take remedial classes in math and English. In the work place, we see under-performing and tenured teachers staying in jobs from which they should have been fired. Unions, notoriously, keep on people long past their prime. Permitting Lois Lerner to stay on at the IRS for over a year did nothing to benefit those who pay her salary – taxpayers. Does anyone believe that government healthcare will attract the best and the brightest? A bell-shaped curve ends up as a single dark smudge in the middle of a graph.

What prompted these comments was an article that appeared on the front page of Monday’s Wall Street Journal, entitled “Open-Government Laws Fuel Hedge-Fund Profits.” The article discusses the fact that hedge funds – and other diligent investors – make use of the government’s Freedom of Information Act (FOIA). The Act was conceived by advocates of a more open government and was prompted by the belief that government was subservient to the individual. It was signed into law forty-seven years ago by Lyndon Johnson, with nine exemptions, which would exclude information that is vital to national security, corporate trade secrets, personal data, information compiled for law enforcement purposes, etc. Nevertheless, the tone of the article suggested that those who sought information under the FOIA were doing something wrong.

The Act allows anyone to receive – for a nominal fee – myriad documents from a host of files in government archives. Information is available from agencies such as the EPA, the Department of Energy, the SEC and the FDA. Such requests, of course, are perfectly legal, as it is government that provides the data.

In 1996, the FDA made a change to the FOIA rules. When the agency gets “frequent requests” for the same records – generally more than three – they make those records available on its website. Of course the information is not pro-actively mailed to every person who has requested data from the agency.

“There is nothing,” as the Journal article declares, “improper about trading on information obtained through a FOIA request, because the government has no duty to keep the information private.” Most investors are not looking for material non-public information. Ninety-nine percent seek information that, as the Journal notes, “helps them to piece together investment strategies or evaluate a company’s prospects.” They are looking for the final piece that allows them to complete a 1000-piece jig-saw puzzle.

Like any other tool that more creative, industrious Wall Street analysts use, they understand the value of their efforts. Complaints have risen from those who have been less creative and less industrious. The authors make the not-very-startling statement that the policy of those who operate the FOIA, according to the Journal, is that “the first person to ask for something is the first to get it… [which is] an irritant to those who say all investors should get it at once.” Not only is such carping impractical, it suggests the complainer is both stupid and lazy. The investment business is highly competitive. Good research implies ferreting out as much information as can be reasonably gathered legally and ethically before making investment decisions. Being early and right is what analysts get paid for. Do not curiosity, intelligence, aspiration and hard work count for anything? Is a policy of equality in outcomes now aimed at portfolio managers? Do not investors, be they limited partners in hedge funds or owners of mutual funds, prefer above-average investment managers? Isn’t that why they pay the fees that they do? Would government prefer that we all invest in index funds? If so, what advantage would a well managed business have over a poorly run one?

The authors of the Journal article quote an analyst from Wedbush Securities who said that FDA reports should be made available to all analysts simultaneously. He is quoted: “If there’s a problem with a facility, it can have a huge impact on the company’s stock price.” I would agree, but shouldn’t we expect those who are charged with the fiduciary responsibility of managing our money to “kick the tires?” Would the Wedbush analyst prefer that all information be force-fed to all analysts simultaneously? Should I be penalized because I read the paper and my competitor did not? Despite being highly regulated, the securities industry is highly competitive, meaning there will be winners and losers. The point of the article is that the information is there for the asking. “…Investors use the process,” according to the authors, “to troll for all kinds of information.” Should diligence be penalized and lethargy rewarded? What does Wedbush want? Do they expect the FDA to notify all investors of every filing? Is there a reason why they cannot file a FOIA request? Over the past five years, there were over three million requests filed; so obviously a lot of investors are in on the game.

In 1961, Kurt Vonnegut wrote a short story, “Harrison Bergeron,” a satirical piece about a utopian state that thrives on social equality. The government employs a Handicapper General whose job is to ensure that outcomes for all citizens – no matter their intelligence, aspiration, artistic talents or physical prowess – will be equal. The fastest runners are encumbered with leg irons. The brightest are given handicaps to dumb them down. The most beautiful must wear masks rendering them ugly. Fourteen-year-old Harrison Bergeron who is athletic, brilliant, handsome, agile and brave must endure all the handicaps. He is ultimately jailed because his innate qualities are considered dangerous to the state. He escapes, thinking he can change a way of life that favors equality, but at the expense of fairness to the aspirational individual. He is only stopped when the Handicapper General, Diana Moon Glampers, shoots him.

None of us can look into the future with any degree of clarity, which is obvious when we hear comments like that made by Lincoln Steffens on his return from a visit to the Soviet Union in 1919 – “I have seen the future and it works.” More prescient were those like George Orwell and H.G. Wells whose imaginative novels told harrowing stories of the dystopian consequences of government over-reach. Once equality in outcomes becomes the goal of government, we will find ourselves on a slippery and insidious slope toward a world absent of individual rights.

Government encroachment touches the entire economy. In the past thirteen years, the United States has fallen from two to seventeen on the Fraser Institute’s measurement of Economic Freedom of the World. The report considers such factors as size of government, the legal system, property rights, soundness of money, free trade and regulation. Among the countries we now lag, according to this report, are Canada, Denmark, Hong Kong, New Zealand, Singapore and the UK, but it also includes Bahrain, Chile, Estonia, Qatar and the United Arab Emirates. It is, as a recent Cato report notes, “…troubling that the United States, the world’s most important economy long associated with market-liberalism, should be in decline.”

Penalizing investors for investing based on information that others don’t have, but is publically available, would set a dangerous precedent. It is really no different than punishing the investor who reads the Wall Street Journal, while his competitor glances at the New York Post. Some analysts and investors work harder than others, stay more involved and, in fact, are smarter. Should they be penalized for being a Harrison Bergeron? As government becomes an ever-bigger part of our economy, with dependency superseding responsibility and indifference repudiating initiative, freedom will be lost to security. It is the gradualness of these changes that make them insidious and difficult to halt. We all must be wary.

Monday, September 23, 2013

"The Fed Blinked"

Sydney M. Williams

                                                               Thought of the Day
                                                                “The Fed Blinked”
September 23, 2013

In almost all aspects of life it is easier to give than to take away. It makes no difference whether one is talking about a dog and a bone, a child and a toy, or a speculator and cheap money. While I make no pretensions of being an economist, it seems obvious after five years that the concept of keeping interest rates at zero and the continuation of expanding the Fed’s balance sheet at the rate of $1.020 trillion a year has done as much (or as little) as it can for the economy. Asset prices, which benefit the wealthy and hurt the poor, have done well. Meanwhile, economic growth remains sluggish. The reason has to do with a failure on the part of the President and Congress to inspire confidence in employers and businesses, because of tax and regulatory policies that are designed to impede, not grow, the economy. The losers have been the people, especially those at the lower end of the income scale.

According to the most recent issue of Grant’s Interest Rate Observer, the Fed’s balance sheet stood at $3.6 trillion on September 11 versus $2.8 trillion a year earlier – an increase of 28.5%. Unwinding the balance sheet will inevitably make dollars scarcer, thereby raising interest rates. But the bigger the portfolio gets the more difficult will be the task of unwinding it. At some point, the cure will be more painful than the disease. Detoxification is never pleasant.

Since 1977 the Federal Reserve has had a dual mandate – stable prices and maximum employment. The former, at least according to conventional reports, has remained sanguine. The latter has not been achieved. It is true that stated unemployment numbers have declined from 10% to 7.3%, but the workforce is about 3 million people smaller than it was when the recession began. If we were to look at today’s employment numbers on an “apples to apples” basis, the unemployment rate, most observers agree, would be over 11%. It has been the excuse of too-high unemployment that has caused the Federal Reserve to maintain exceptionally low interest rates. Even so, we know those rates have done little to help average families, while they have benefitted the wealthy. Had the President and Fed officials claimed to have represented the one percent, we would be giving them high-fives for mission accomplished.

Mr. Bernanke has tried to exit gracefully from his commitment to bond purchases. But his assurance that “tapering” would be gradual has not soothed timorous markets. It may be premature to say, but it is very possible that the 30-year bull market in Treasuries may have given up the ghost about three weeks before Mr. Bernanke announced his intention that he might possibly scale back his purchases. The trough in the 10-Year occurred on May 2, with a yield of 1.61%. Last week, after Mr. Bernanke announced his surprise decision, the yield fell 35 basis points, but by Friday had made up most of Thursday’s loss. It closed at 2.73%. Time will tell whether the May lows will hold. But it could be buyers have become concerned, regardless of Mr. Bernanke’s decision, that 2.7% is inadequate compensation for the risk of holding a U.S. Dollar, which has fallen by a third over the past decade, for ten more years. If nothing else, Mr. Bernanke’s retreat from expectations is further proof that the future can never be clear, no matter the best intentions of government policy makers.

While it seems to me that the Fed, in giving us an extended summer, the worry is that a focus on the Fed ignores the far bigger problem. The real fault lies with an Administration and an obstreperous Congress that have refused to work together to address the fiscal world of make believe they now occupy. Both parties are guilty. We have a President who would rather make teleprompted speeches to scripted and adoring fans, than to negotiate with bloviating Democratic Senators and Republican House Members, who seem intent on defunding ObamaCare regardless of the consequences. The result is a stalemate with the economy continuing to founder. Creativity has been limited to the words each uses to describe the other party. Mr. Obama will negotiate with Mr. Putin on the latter’s terms, but he won’t negotiate with a Republican-led House. Mr. President, you have a country to run and an economy that is chugging along like my great-Aunt’s Model-A roadster. An underperforming economy hurts the poor and the middle class more than anyone else. When you and the Congress refuse to act like grown-ups, responsibility falls to the Fed. They, as a consequence, become the only responsible game in this kindergarten we call Washington.

For most of the 1980s, the 1990s and into the early 2000s, low and middle-income consumers benefitted by a strong Dollar, declining oil prices, steady gold prices and a low price of goods produced in low-wage places like China, Indonesia and Vietnam. That pleasant backdrop for American consumers began to change, as labor costs began to rise in emerging nations, the Dollar fell and oil prices rose. In the wake of 9/11, the Fed lowered interest rates and Congress encouraged speculative buying of houses with borrowed money. Mr. Obama’s policies, like his predecessor George Bush, had the effect of lowering the value of the Dollar and increasing asset prices, including gold. The ones that have been most squeezed are those on the lower end of the income scale. Because of Mr. Obama’s failed policies, income inequality has grown, despite his promises to help the poor and the disadvantaged.

Seth Lipsky, founder and editor of the New York Sun had an op-ed in last Thursday’s New York Post that should be read by anyone interested in the debilitating effects of a weak currency. What Mr. Lipsky did was to measure the increased price of gasoline, groceries and houses, not only in nominal terms, but adjusted to the price of gold. For example, he wrote that since Bernanke became Fed Chairman, the price of gasoline has risen 54%, while the value of that gallon of gas has plunged nearly 33% to 1/372nd of an ounce of gold. The monthly grocery bill for a family of four has jumped 25% to $1036, while the value of those groceries fell 45% to 0.79 ounces of gold. And the average new home rose 4.2%, but the value fell 54% to 257 ounces of gold. Cheapening our currency can temporarily cover up for the deficits that, as Mr. Lipsky put it, “Congress lacks the backbone to control.”

It is easy to get exasperated with most of our politicians in Washington: a photo in Saturday’s New York Times of Eric Kantor, a supercilious grin on his face, as he struts through the halls of Congress; another photo shows a s***-eating grin on Senator Schumer’s face as he looks adoringly at Caroline Kennedy in Senate hearings on her confirmation as America’s Ambassador to Japan. She is a woman whose most important qualification for this sensitive post is being the daughter of a President who became idolized in death; In a TV interview, we see a dyspeptic Harry Reid waspishly chastising the Republican House. But nothing rankles more than another sermonizing, teleprompted speech from the President on rebellious Republicans who, like the pot calling the kettle black, he claims are putting politics above the needs of the people. Meantime, he irresponsibly sends the country careening toward a dependency-state and likely financial Armageddon, with little concern as to the harm he is causing.

The President says he speaks on behalf of the nation’s poor and middle class. Yet his policies have served to damage them. Employment is lower by about three million. Oil prices are up by 108% and the Dollar has declined seven percent. At the same time, gold has risen 48%, common stocks are up over 100% and High-yield bonds have fared even better, as their yields have declined 1000 basis points. The President has urged and Congress has passed myriad regulatory proposals (Dodd-Frank and the Affordable Care Act being the two most prominent) that have increased the cost of doing business, while reducing business confidence. There have been thirteen tax increases in 2013 alone, according to the Heritage Foundation, six of which are to pay for ObamaCare. A year ago, US News & World Report listed twenty-one tax increases since Mr. Obama took office. The tax code is now so complex that only the most sophisticated accountants and lawyers can make their way through its maze. Half the nation’s workers pay no Federal income tax. Therefore the complexities, which primarily benefit the rich and the largest corporations, do the most damage to the nation’s middle class.

In a speech before the U.S. Manufacturing Summit, Richard Fisher, president of the Dallas Federal Reserve, argued that the U.S manufactures have the potential “…far and away, to be the most efficient operators in the world.” He added: “We must insist that Congress practice a little Schumpeterianism of its own: throwing out old, counterproductive fiscal and regulatory policies and ushering in new ones that unleash job creators from the starting gates.” In the calcified environment that is Washington, with a President who would rather golf and make speeches and Republicans who would rather defund ObamaCare than let it collapse of its own weight, Mr. Bernanke may have had no other choice than to blink.

Friday, September 20, 2013

"American Exceptionalism"

Sydney M. Williams

                                                                 Thought of the Day
                                                           “American Exceptionalism”
September 20, 2013

Thanks to Russian President Vladimir Putin, the generally mis-defined concept of American exceptionalism has again come to the fore. In last week’s New York Times, Mr. Putin displayed his lack of knowledge of the United States’ founding. Toward the end of his op-ed, he attacked President Obama for stating that the United States’ policy is “what makes America different. It’s what makes us exceptional.” Mr. Putin responded, “It is always dangerous to encourage people to see themselves as exceptional, whatever the motivation.” Mr. Putin was trying to score points off a President he sees as weakened; instead, he displayed his ignorance.

The Russian president was following the footsteps of his predecessor Joseph Stalin who used the term “American exceptionalism” in 1929 to ridicule America for its “abnormalities” – that it did not welcome the proletariat revolution and that it was heresy to believe that Americans were immune from the inevitable forces of “Marxist laws of history.” Seymour Martin Lipset once wrote that the concept of American exceptionalism was used by those like Stalin to rationalize “why the United States is the only industrialized country that did not have a significant socialist movement or Labor party.” But why would we have? The American worker, in the post-World War I period was better off than his counterparts in Socialist countries. During the third decade of the 20th Century, thanks to the pro-growth policies of the Coolidge Administration, America was experiencing the fastest pace of economic growth in its history. Average wages were rising at unprecedented rates; the automobile was becoming ubiquitous; more and more parts of the country were being electrified; the radio was allowing even those in rural areas to connect with other regions of the country; washing machines and vacuum cleaners freed housewives from the drudgery of daily housework. Europe, during those years, was still extricating itself from the destruction of the Great War. At home, Capitalism brought wealth to millions of Americans, while Communism impoverished and enslaved even more millions of people in the newly-formed Soviet Union.

But none of this had anything to do with what Alexis de Tocqueville saw as American exceptionalism. He saw America as exceptional for its devotion to the practical, rather than to the arts. He saw it in the form of government the Founders had created and in the industriousness of the people. He saw it in their egalitarianism, religiosity and their dependency on the community. Keep in mind, at the time class systems dominated Europe, royal family’s generally reigned supreme and where a republic had been tried – France – it had proven a disaster.

Most importantly, we are (or were?) exceptional because of the nature of our founding and the institutions of government that were then created and which remain today. What those men did was without precedent. Between 1776 and 1789, the founders peacefully forged a law-centric republic, predicated on the separation of powers, using principles of checks and balances, all based on representative government. They created a nation that promoted democratic ideals and personal liberty, with elected leaders who were accountable to the people. And they did this while fighting a bloody revolution. In the annals of man, it was truly unique – “The greatest single effort of national deliberations that the world has ever seen,” as John Adams once wrote about the process of creating the Constitution..

Charles Murray, author of The Bell Curve and Coming Apart, recently published a short (50 pages) book, American Exceptionalism: An Experiment in History. He states that American exceptionalism stems from four elements: geography, culture, ideology and politics. We were unique in that we were a nation bordered by non-belligerents on the north and south and by oceans on the east and west. The very harshness of the environment, in those early years, meant only people of a certain character would emigrate. An absence of a state religion allowed for a “free market” of competing religious sects. The late political sociologist quoted above, Seymour Lipset, once said that America’s unique ideology can be described in five words: “liberty, egalitarianism, individualism, populism and laissez faire.” Even after our political system had been created, community ties to myriad local organizations served to keep people happy and government small. Some of the characteristics described above remain true. Others no longer apply.

American exceptionalism is sometimes confused with patriotism, which it is not. There is nothing wrong with patriotism; in fact, I consider myself a patriotic American. But patriotism is an emotion we feel, especially during times of anguish, as was experienced during World War II and manifested in movies from the era. We saw it in the lapel pins that became so common in the aftermath of 9/11. Patriotism, however, can be carried to extremes and when it does there is often a backlash, as we saw during the Vietnam era. It became common during those years to quote sarcastically the famous words of Stephan Decatur, one of the fathers of the United States Navy. Returning home after successfully ending the Barbary state piracy, he raised his glass in a toast: “…our country, right or wrong.” What people forget is that those seemingly belligerent words were preceded by qualifiers: “Our country! In her intercourse with foreign nations, may she always be in the right; but our country, right or wrong.” The preceding words, “…may she always be right” removes the jingoistic sting of the last five words. Regardless, patriotism is an emotion that can be played to and often is by politicians, sometimes appealing to our worst instincts. In contrast, American exceptionalism, as Mr. Murray wrote in his short book is a “fact of America’s past, not something you can choose whether to ‘believe in,’ any more than you can choose to ‘believe in’ the battle of Gettysburg.” It is part of our history.

There are politicians who infer that we Americans, as an exceptional nation, have “a rendezvous with destiny” and there are others who claim we are no more exceptional than the British or the Greeks. Both observations miss the point. It is the uniqueness of our history that has made America an exceptional nation. We are not, as some would have us believe, God’s chosen people. We are not superior. We are flesh and blood, descended from ancestors who had courage and conviction and who braved intolerance, intimidation and the elements to emigrate to these shores. We are lucky to live under a government that was created over those dozen years by a group of disparate men from states a thousand miles apart, men who declared their independence in a stirring document, followed by a bloody revolution. Victory in revolution coincided with the adoption of a Constitution, which is now the world’s oldest. The colonists were fortunate as well, in that 3000 miles of ocean separated them from their enemy, an enemy who commanded the world’s largest navy and biggest army. It was also an enemy who represented the country from which most of the founders had come. Nevertheless, the Founders knew they were creating something extraordinary. The concept of giving the power of the Presidency to a man who would willingly give it up following elections was an idea alien even to the British, otherwise the most liberal of all European nations. The motto on the Great Seal of the United States reads novus ordo seclorum – “a new order for the ages.” The founders knew they had created something unique.

There was much in our early history one can criticize, and which we should remember in shame. Early settlers essentially practiced genocide on the native Indian population. The concept of freedom, according to the Founders, did not extend to slaves. However, on balance, America has been a force for good, and for that we should take pride. Those early Americans formed a government, limited in its powers and responsible to the people. It was based on the concept that we are all created equal, and were endowed with certain inalienable rights – granted, not by government, but by our creator. Once the Founders completed writing the Constitution, Benjamin Franklin allegedly responded, in regard to a query as to what form of government had been created, “It is a republic, Madam, as long as you can keep it.” Our exceptionalism is based on all the above factors – geographical, political, cultural and ideological – that allowed the early pioneers to hew from a largely virgin frontier a new nation, under laws, not people. There is nothing exceptional about anyone of us individually. We are just lucky to be here, but with that good fortune goes a responsibility, to live up to the standards set two centuries ago – to try to keep those factors alive that made America exceptional.

Wednesday, September 18, 2013

"Changes in the DJIA"

Sydney M. Williams
                                                                 Thought of the Day
                                                              “Changes in the DJIA”

September 18, 2013

Last week Dow Jones announced that on the 20th of this month they will be removing three names from the Dow Jones Industrial Averages (DJIA) – Alcoa, Bank of America and Hewlett-Packard and adding three, Goldman Sachs, Nike and Visa. Created in 1896, the components of the Average have changed many times to reflect the changing nature of American business. In its early years, changes to the list were frequent. Once it settled into middle age – post 1928 – additions and deletions slowed. In recent years, the list has become more active, reflecting the dynamics of the American economy.

Clarence Dow and Edward Jones formed Dow Jones in 1882. Their first product was the hand-delivering of brief news items to traders at the two stock exchanges. In May 1896 they created an industrial index composed of twelve companies, one of which – General Electric – is still listed. (Twelve years before the creation of the DJIA, Dow Jones created a Transportation Index, comprised of ten railroads and the Western Union Telegraph Company. Interestingly, Western Union spent eleven years, 1916 – 1927, as a component of the DJIA). Mr. Dow and Mr. Jones early on recognized the dynamic nature of American business and that no company on the list was sacrosanct. In the first two years there were five substitutions, including U.S. Rubber, which was on the initial Index, but removed six months later and then re-added two years later. In 1916, the Index was expanded from twelve names to twenty.

In 1928, the list was increased from twenty names to its current number of thirty. That is despite a U.S. domestic GDP that has grown from $97 billion in 1928 to $16.6 trillion in 2012, and an increase in the value of all publically traded stocks from about $175 billion in 1928 to about $19 trillion today. Since 1928, the DJIA has had a price-only CAGR (compounded annual growth rate) rate of 5.2%, about one percentage point below the compounded annual growth in GDP. Of the thirty names on the list in 1928, only two remain: General Electric and Exxon, the latter then known as Standard Oil (NJ).

Keeping the list representative of the changing economy cannot have been easy. One of the companies removed this week, Bank of America, was added only five years ago. That may seem fickle, but the results support the decisions they have made. The DJIA has often been dismissed as obsolete and unrepresentative. A recent, derisive, and in fact supercilious article by Derek Thompson in the Atlantic was entitled “The Dow Jones Industrial Average is Adorable, Should Never Change.” In the article, Mr. Thompson wrote, “The economy is impossibly complicated,” an assertion with which one cannot disagree. He noted that companies are constantly being added and subtracted. He dismissively asked: “This is useful, how?” Assuming the question is not rhetorical, this is how. High frequency traders measure duration in seconds, while mutual fund managers, on average, turn over their entire portfolios once a year. In contrast, the DJIA, in adding six names in the past five years while removing the same number, reflects a turnover of 20%. If anything, the changes in the DJIA have been sluggish. Yet the performance over almost any time frame has remarkably hewed to that of the market as a whole.

Similarly, Neil Irwin of the Washington Post was equally critical and condescending in a piece entitled, “Let’s Make That ‘S&P 2000’.” He writes that while it may be tempting to use the occasion to examine the symbolism of what these changes say about corporate America, “…in reality, it really only shows the utter uselessness of the Dow Jones Industrial Average for measuring anything.” His comments are not only derogatory, they are inaccurate. Performance of the DJIA, over almost any time frame, has mimicked that of the broader market.

It is easy to criticize the DJIA. It is a price weighted index, which gives more weight to high priced stocks than low priced ones, regardless of market capitalization, a silly concept admittedly, and of course it consists of only thirty companies. While the number of publically traded companies in the Wilshire 5000 has, according to USA Today, fallen from 5672 in 2000 to 3687 at the end of last year, thirty companies still represent less than one percent of all publically traded businesses.

Nevertheless, it is the consistency of the DJIA’s relative performance over the decades that has been remarkable. Since I started in this business forty-six years ago, the DJIA has compounded annually at 6.3%, on a price-only basis. During that same time, the annual compounded price-only return to the S&P 500 has been 6.4%. The Wilshire 5000 did not exist. However, if one goes back to December 31, 1980 the base total market capitalization of the Wilshire 5000 has compounded annually at 8.4%. During that same time, the DJIA has compounded at 8.7%...again, without dividends. The S&P 500, over that same 33-year period compounded at 7.9%, suggesting the Dow Jones more closely reflected the broad market over the past thirty-odd years, as represented by the Wilshire 5000, than did the S&P 500.

In May 1896, the twelve stocks in the new DJIA represented American business. They included American Cotton Oil, American Tobacco, National Lead, U.S. Rubber and, of course, General Electric. Reviewing the list of components and changes over the years,, one is struck by how accurately the components represent our nation at each point in time.

Every other stock market index appeared subsequent to the DJIA, so there is no way to fairly measure how it has performed respective to the broad market over its life, but what we do know is that, in the years since there have been competitive indices, the DJIA has tracked well. It comprises a small number of large companies. It is price weighted versus the more common measurement of cap-weighted. From the day the Dow Jones Index peaked on September 3rd 1929, eighty-four years ago, the CAGR for the DJIA has been 4.5% before dividends. The CAGR for the S&P 500 over the same time was 4.8%. Keep in mind that the yield on the DJIA has historically been about 100 basis points higher than that of the S&P 500, which would have more than made up the difference. The CAGR for the DJIA since hitting its 100-year low on June 30, 1932 has been 7.6%, exactly the same as that for the S&P 500. Because the yield on the Dow has typically been higher than that of the S&P 500, total returns for the former have been slightly higher than the latter

The same is true for the short term. Year-to-date through yesterday, the price return on the S&P 500 is a positive 20%; for the DJIA it was 10%. However, again the yield on the DJIA is about 80 basis points higher than that of the S&P 500. Given the differences in weightings and in actual number of issues, the differences are surprisingly small.

Time may prove reporters like Mr. Thompson and Mr. Irwin eventually correct, but thus far the remarkable thing about the Index is that, in markets that are increasingly complex and varied, simplicity has worked, at least in this small corner of the investment universe.

We live in a world in which everything moves at ever-increasing rates of speed. In the thirty-eight years between 1929 and when I entered the business in 1967, thirteen companies had been removed from DJIA and a like number added. In contrast, over the past forty-six years (1967 – 2013) twenty-four companies were added. In the first period, one change was made every three years; in the second, one change was made every two years. Including the three companies that will be added on Friday, there will have been seven additions and deletions in five years. A point of interest is that there are six companies in the DJIA that did not exist when I entered the business: Cisco, Home Depot, Intel, Microsoft, Nike and UnitedHealth Group.

We should expect further changes. Apart from the politics, both domestic and geo-political, there are positive drivers of change in the economy. Most obvious is that money remains plentiful and cheap. Shale fracking is leading to more abundant and cheaper energy sources, reducing our dependency on imports and aiding manufacturing in a globally competitive market. The creative destruction, so aptly described by Joseph Schumpeter is changing the way we communicate, and our universities remain the best in the world; though our underperforming public high schools are concerning. The only fly in the ointment is Washington where a lack of pro-growth fiscal policies and an abundance of regulatory rules provide a governor on growth. Nevertheless, as the economy expands in different directions one should expect the composition of the DJIA to reflect these continuing changes.

Monday, September 16, 2013

"Five Years On"

Sydney M. Williams

                                                                 Thought of the Day
                                                                   "Five Years On”
September 16, 2013

The cover of New York magazine, for the issue dated September 29, 2008, depicted a trader on the NYSE, his right hand covering his face, which has been thrown back in despair. The lead article was entitled “The Great Shakeout: Goodbye Masters of the Universe, Hello Ron Hermance of Paramus, New Jersey.” The piece, written by the inimitable but often fallible Jim Cramer, described the demise of Wall Street as it was known and the rise of a new George Bailey, Ron Hermance Mr. Hermance was then president of Hudson City Bancorp. (Today he is chairman.) Mr. Cramer noted that as Lehman ceased to trade, Hudson City (HCBK) was hitting new highs.

Five years later, Hudson City Bancorp is selling at half the price it sold for in September 2008, while JP Morgan Chase, Goldman Sachs, Wells Fargo and Morgan Stanley are all trading above where they were at that time. (Bank of America and Citigroup, it is true, remain considerably below where they traded in the fall of 2008.) It all suggests conventional expectations are often wrong, and what looks to be a rising star may only be a flickering candle. Mr. Cramer was right in the sense that some of Wall Street’s swagger has been tempered, but it has not been eviscerated, as the tale of the “London whale,” Bruno Iksil, relates. Nevertheless, banks are better capitalized than they had been. In the September 7 issue of The Economist, it is stated that America’s big banks have risk-weighted capital of 13%, far above the 6% Basel III requirements and 60% higher than the pre-crisis levels. However, the definition of “risk-weighted” can be vague and is nowhere etched in stone. In the meantime, big banks have become even larger, meaning that their collapse would be even more devastating. When the crisis hit five years ago, the four largest banks – Bank of America, JP Morgan Chase, Citigroup and Wells Fargo – held about 35% of all banking assets. Today those four banks hold a bit more than 55% of the roughly $13.7 trillion in bank assets.

On Sunday, September 14, 2008 Lehman declared bankruptcy, adding gasoline to tinder that was already burning. “It (Lehman’s bankruptcy) was,” as Hank Paulson wrote recently in Bloomberg Businessweek, “a symptom, not the cause.” The entire process, over the previous twenty months, had been like watching an accident occur in slow motion.

In February 2007, Freddie Mac announced that it would no longer be buying the riskiest subprime mortgages. Two months later, New Century Financial, a subprime mortgage lender, filed Chapter 11. In July of ‘07, Countrywide Financial warned of “difficult conditions.” That same month Bear Stearns announced they were liquidating two hedge funds that invested (speculated?) in mortgage securities. The next month another lender, American Home Mortgage Corp., filed Chapter 11. During that summer of 2007 the Federal Reserve began lowering the Fed Funds and Discount rates. In October, incredibly, the stock market hit all-time highs! In January 2008, Bank of America bought the floundering Countrywide Financial. In March, Bear Stearns was saved from liquidation at the last moment in a shotgun marriage with JP Morgan Chase. By early September Fannie Mae and Freddie Mac had been forced into conservatorship. On the day that Lehman filed bankruptcy papers, Bank of America was arm-twisted into buying Merrill Lynch. Two days later AIG was rescued with an $80 billion taxpayer-funded bailout that gave government 80% ownership of the company. By the end of September Washington Mutual and Wachovia were sold, as they were failing. Goldman Sachs and Morgan Stanley were converted into commercial banks, providing them access to the Fed’s discount window. In October, the Federal Reserve began paying banks interest on reserves, as a means of encouraging them to strengthen their balance sheets, but effectively paying them not to lend.

A TARP (Troubled Asset Relief Program) Bill passed in Congress on its second attempt, and almost immediately had to change its purpose from buying assets to injecting capital directly into banks. It was critical that the system be saved. The consequences would have been unimaginable. In the same article mentioned above, Mr. Paulson wrote: “I was never able to convince the American people that what we did with TARP was not for the banks. It was for them. It was to save Main Street. It was to save our economy from catastrophe.” It was the paying of the huge bonuses to certain bank executives that rightfully angered the American people. Paulson agrees: “That infuriated me – the sheer cheekiness of it. Forget whether they were legally entitled to their bonuses, it was such a graceless lack of self-awareness and a total lack of understanding about how the rest of the world and the rest of America looked at them.” This hubris persists and represents a character flaw that unfortunately permeates much of our culture, not only on Wall Street but in the media, the entertainment world and, most glaringly, in Washington.

For those of us who were mere cogs among the large wheels of finance, those weeks cast an eerie spell. On the Tuesday morning following Lehman’s announcement, I wrote in a TOTD: “It was…the sense of helplessness – that factors not only beyond our control but beyond our understanding are at the root of the problem.” The next day I wrote that these events seem like “a series of controlled explosions.” But by mid November I was more optimistic. Markets were adjusting to the new reality. Three-month Treasury bills were yielding 12 basis points compared to 171 basis points at the end of June and 91 at the end of September. The S&P 500 had declined almost 40% from the end of June. The yield on the Bloomberg High Yield Index was approaching 25%. On November 19th, I noted that some investors who had been bearish for years – people like Seth Klarman, Jeremy Grantham and James Grant – had been making some positive overtures. It was four months too early, but their attitudinal changes proved prescient.

It is the lessons to be learned from that period that should not be forgotten, in particular the role played by all of us – consumers, bankers, politicians, investors and homebuilders – in either helping cause or allowing the conditions to develop as they did. Most of us danced to the tune of easy money for little risk. And we learned the hard lesson that there is no such thing as a free lunch, whether it is offered by your local banker or your favorite politician. A re-reading of Stephen Vincent Benet’s The Devil and Daniel Webster is a reminder of pacts made with the devil. Such options are never rewarding. In doing so, we ignore the negative consequences because they seem remote and unlikely. An old adage says, “If it sounds too good to be true, it probably is.” That does not mean we should not take risks. There are times when we should, but it is equally important to consider and reflect on human behavior. When everyone has moved to the port side of a ship, it probably makes sense to cling to the starboard rail.

As well, we should not forget the role played by those who helped extricate us, preventing what easily could have become a far-worse disaster. As I have written often, then Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke and then president of the New York Fed Timothy Geithner, supported by the Bush Administration, saved us from what could have been a far more calamitous outcome. They deserve our applause. Could they have done things differently with better outcomes? Possibly? But what they did worked, which has allowed many of us the liberty to bellyache about unintended consequences. Monday morning quarter-backing is fine for chowderheads and even for those who seriously study the past that it might allow them to gain better insight into the future. But those who re-write history for political or financial gain do themselves and the rest of us a disservice.

With little reason to credit government, we are in a better place. That is because common sense does, at times like those, dictate behavior. Government’s response, as it always is in times of crises, was to add to the bureaucracy through more regulation – creating rules designed to abort the most recent crisis, rather than to prepare for future disasters. Dodd-Frank, as I wrote on Friday, is tediously cumbersome. It is laden with 400 separate provisions, to be monitored and regulated by overlapping agencies. It is a dream for lawyers, but a nightmare for practitioners. Skepticism has largely replaced complacency, certainly as far as leverage is concerned in banks and among consumers. However, the risk of moral hazard remains, but today assumes a different form. Banks were bailed out, but what happens to promises today by governments to their employees – the overwhelming problem of unfunded liabilities? What about government’s promises to the elderly or to those in need of government sponsored healthcare or our veterans? What about student loans, assumed because of an implied promise made to the young that a college education is necessary to achieving the “American dream.” Instead of realizing that dream, about a quarter of today’s college graduates and dropouts are living at home, while earning the minimum wage. What about union leaders who have made promises to their members that taxpayers may not be able to afford? We persist in a Walter Mitty-like world. This time, however, the excesses are in Washington, not Wall Street or Main Street.

In last Friday’s Financial Times, Gary Silverman noted that that era (the late 2000s) was “marked by the decline in relationship banking,” and that, “in its place less, less personal market mechanisms grew in importance.” “Relationships,” Mr. Silverman wrote, “had duration.” In that regard, we are worse off than five years ago. Today we are talking about durations that last as long as a high frequency trade. Jimmy Stewart and the George Bailey character he played in It’s a Wonderful Life are gone forever, except perhaps in our smallest towns. Our jobs, as stewards of our assets, have become more difficult.

When we look for excesses in markets today, we see them in short term rates. Cheap borrowing costs have fueled asset prices. Yesterday, after Larry Summers removed himself from consideration for Federal Reserve Chairman, stock futures rose one percent. We also see excesses in the reach of government. As government makes promises, in terms of entitlements that will become difficult to honor, it raises questions of long-term dollar strength. As government consumes an ever increasing portion of the nation’s GDP, economic growth inevitably becomes tempered. It behooves each of us to take measure of conditions and people to the best of our abilities. Being personally responsible is never out of fashion. Trust, but verify, as President Reagan would have put it – not to be cynical, but to be careful.

Friday, September 13, 2013


Sydney M. Williams

                                                                   Thought of the Day
September 13, 2013

For those who believe the word Obamaconomy has been contrived, it has not. It is defined by the Urban Dictionary: (n.) 1. the structure or conditions of economic life in the U.S., as managed under President Barack Obama. However, its true definition is more specific…and more depressing. The economy has experienced sub-par growth ever since the recession was officially declared over in June of 2009. In the 15 quarters since the recession ended, GDP growth has averaged about 2.3%, about half the rate exiting from prior recessions. Ironically, it has been severest on those who were Mr. Obama’s most enthusiastic supporters. When the recession ended in June 2009, median household income was $54,478. Since then, and reflecting the unfortunate impact on middleclass families, it has fallen 4.4% to $52,098. African-American heads-of households have had their incomes decline 10.9%. Those under 25 have seen their incomes fall 9.6% and single women, with and without children, have had their incomes decline 7%.

Mr. Obama set out to help the poor and underprivileged, but his policies have in fact benefitted the wealthy, principally because artificially low interest rates have boosted asset prices, including stocks. On Wednesday, the New York Times quoted a study prepared by economists Emmanuel Saez and Thomas Piketty that the top 1% took home more than one-fifth of the income earned by Americans in 2012, “one of the highest levels on record since 1913, when the government instituted an income tax.” While tax increases in 2013 caused some investors to accelerate their income into 2012, the numbers are still surprising. The failure of the President’s economy is centered on a misconception that a policy of redistribution will help the poor, the middle class and the economy as a whole. It doesn’t.

Does this suggest that the President is a closet capitalist? I suspect not. More likely it simply argues that he does not understand the link between private investment and job growth, and that a simpler tax system and less cumbersome regulation stimulate confidence. Improved confidence drives job growth and investment, which reduces unemployment and improves family incomes. It is not rocket science. And it doesn’t take more government. It takes less.

Unemployment peaked in October 2009 at 10%; it has since declined to 7.3%. However, labor participation declined from 66% in December 2007, at the peak of the previous business cycle, to 65% when the recession ended, to 63.2% in August of this year. The jobless rate did fall from 7.4% in July to 7.3% in August, but the principal reason for the drop was the decline of 312,000 people in the labor force. Lawrence Lindsay, president of the Lindsay Group, has estimated that if the labor force participation rate were the same as it had been before the recession began, unemployment would be 11.2%.

Mr. Obama inherited a financial crisis of unprecedented magnitude. In the fall of 2008, it appeared that capitalism might fail. There were those at the time who invoked the spectre of Karl Marx. He (Mr. Marx) had claimed that the collapse of capitalism was inevitable, because it had within itself the flaws that would cause it to self-destruct. (Mr. Marx was thinking of the inherent conflict between the business owning bourgeoisie and the worker proletariat – that ultimately the ranks of the proletariat would swell to a level that would dwarf the bourgeoisie. Mr. Marx, however, underestimated two human traits: First, business owners have a self interest in keeping workers happy and, second, collective bargaining allowed workers to achieve fair compensation and improved working conditions, including non-nonunionized businesses.

In any event, the system in 2008 held. For that we owe thanks to the chief architects of the defensive measures taken that fall by the Bush Administration: especially Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke and NY Fed President Timothy Geithner. While the recession still had six months to run and the stock market would not hit bottom for another six weeks, by the end of December, less than four months after the bankruptcy of Lehman Brothers, the High-Yield market was on the rebound and the TED spread (the difference between Three-Month LIBOR and Three-Month US Treasury Bills) was narrowing. The yield on the Bloomberg High Yield Index had declined from 25% at the end of November to 17.4% at the end of December. The TED spread had narrowed from 485 basis points at the end of September to 166 basis points on December 31 – still high, but indicating that credit markets were righting themselves. Monday morning quarterbacking has suggested that all did not work perfectly. It did not, but the system did not collapse and that is what was critical.

Instead of encouraging the natural restorative powers of capitalism and markets, Mr. Obama, once sworn in, chose to involve the State in a bigger way. This was when Rahm Emanuel made his infamous remark that a crisis should never be wasted. Mr. Obama bailed out General Motors, but in doing so he placed the demands of creditors behind those of union members, something that would not have been allowed in a court of law. With Democrat majorities in both the Senate and House, a stimulus package was passed unilaterally, with no Republican votes. Letting Messers Dodd and Frank design the Wall Street Reform and Consumer Protection Act was akin to letting the fox design security for the henhouse. There was no question that a significant portion of blame for the crisis could be laid at the feet of Wall Street traders and bankers. They had used depositors’ money and debt to make bets that would provide outsize returns to themselves, while letting creditors (including depositors) assume the losses. (It got even better for bankers when taxpayers were asked to pick up the losses.) But Mr. Obama failed to fully appreciate the cronyism that exists between Wall Street and politicians.

Washington went into overdrive, creating regulations that will take dozens of lawyers dozens of years to comprehend. Dodd-Frank has over 400 provisions; it is too complex to be understood by any but the very largest companies with their legions of lawyers. This morning JP Morgan Chase announced they were hiring 5000 people to ensure they are incompliance. Those costs will be borne by depositors, lenders and shareholders. Assets of the ten largest banks have increased 40% to $11 trillion in the past five years. If the banks were too big to fail five years ago, they are far too big to fail today. Besides which, the Volcker Rule – the one aspect of Dodd-Frank that might prevent taxpayers from having to bail out the banks in the future – may never be implemented.

Over the years lobbyists have become increasingly powerful, and their power has only grown under the Obama Administration. They represent myriad organizations, from labor unions to industry groups to large corporations. They do not represent the people. Lobbying per se is perfectly legitimate. It is a means by which an organization can make their wants known. Unfortunately, however, their influence has become pervasive, adding to the complexity of the tax code and regulations. The unintended consequence has been an entanglement that has not only added unnecessary costs to businesses, but has reduced the confidence necessary for them to expand and hire, and to allow the economy to grow more quickly.

In his review of Lawrence Lindsay’s The Growth Experiment Revisited, in Tuesday’s Wall Street Journal, Stephen Moore pointed out that in the twenty-five years following the Reagan tax cuts $40 trillion was added to American’s net worth, and that 40 million American were added to business payrolls. The mistakes made by both Presidents Hoover and Roosevelt in the early 1930s – raising taxes and increasing tariffs – were not made by either Reagan in 1982 or George W. Bush in 2001. In both cases, in 1982 when unemployment reached 10% and held that level for the longest period in the post-War period and in 2001, amidst the bursting of a stock market bubble and an attack by terrorists, the Country was able to ward off what could have been far worse recessions. In contrast, Mr. Obama chose the Hoover/Roosevelt model – not raising tariffs, but increasing taxes and tightening regulation.

No system, either political or economic, is perfect. However, over time democratic capitalism has served the people well. Despite claims by some on the Left, no sensible person on the Right believes in an absence of regulation or taxes. The debate is about what level of each allows for maximum growth in the economy, while providing safety and protection to the people. Unfettered capitalism leads to anarchy and ultimately collapse. Taxes that are too high and regulation that is too extreme cuts off the life-blood of economic growth, eventually leading to collapse.

But a system that has helped the rich at the expense of the poor and middleclass is, in the end not good for either. An economy that has almost 20% of the population on food stamps – 48 million people – is one that creates dependency, not responsibility. What is needed is a simplified tax code, easily understood and regulation that is equally simple and, importantly, enforceable. In Connecticut, my electrician tells me that he has to file with seven regulatory bodies, some of which are over-lapping. It takes time and money…and costs jobs. Mr. Obama’s attempts at redistribution have failed, hurting job prospects for those he had hoped to help. It would be untrue to say that Obamanomics has been a total failure. The economy is chugging along, but at a pace well below its capability. The results have not matched the promise. The Obamaconomy has made all of us worse off.

Wednesday, September 11, 2013

"Bengahzi - One Year Later"

Sydney M. Williams

                                                               Thought of the Day
                                                       “Benghazi – One Year Later”
September 11, 2013

“And make no mistake, justice will be done,” so said President Obama on September 12, 2012. He spoke in the aftermath of the murder of Ambassador Chris Steven’s and three others by terrorists the night before. Twelve months later the only person brought to justice, has been Nakoula Basseley Nakoula who produced the video, The Innocence of Muslims. The Administration blamed the attack on the Consulate in Benghazi on the fourteen-minute trailer of that film. Mr. Nakoula was arrested on the 27th of September and sentenced to a year in jail on November 7th. In the meantime, the Islamic extremists who killed our men roam free.

The long delay in indicting Ahmed Abu Khattala, the Benghazi leader of the jihadist group, Ansar al-Sharia was incomprehensible. According to a timeline provided by CNN, the State Department on the evening of the attack sent an e-mail stating that the terrorist group Ansar al-Sharia had taken responsibility. The e-mail went to the White House, the Pentagon and the FBI. The same terrorist group was mentioned the day after the attack in London’s Globe and Mail as a “popular suspect.” Nevertheless, two days later, on the 14th, as the bodies of the four victims arrived at Andrews Air Force Base, Secretary of State Hillary Clinton blamed the attack on “that hateful video,” with no mention of Ansar al-Sharia. On Sunday, September 16, Susan Rice, then U.S. Ambassador to the United Nations, was sent to the TV talk shows to lay blame on the video, which she did. (In a bizarre and frankly inexplicable move, the Administration – on the one-year anniversary of Benghazi – has Ms. Rice [now National Security Advisor] briefing the House on Syria. Sending a known fabulist on a mission to elicit support from a recalcitrant Congress says a lot about the world of make-believe the Administration inhabits.)

But to return to Ansar al-Sharia and Mr. Abu Khattala, officials from the United States, including the FBI, claimed an inability to find and speak with Mr. Abu Khattala, claiming that his “whereabouts were unknown.” Yet on October 18th both the New York Times and Reuters interviewed him. David Kirkpatrick of the Times described the meeting on October 18th: “Mr. Abu Khattala spent two leisurely hours on Thursday evening at a crowded luxury hotel, sipping a strawberry frappe…” Subsequently, CNN interviewed him and so did the Associated Press. The murder charges against Mr. Abu Khattala and others were finally filed in abstentia on August 5th, almost eleven months after the carnage. The Times noted the next day, “It is not clear that either government (Libya or the U.S.) knows the whereabouts of all the suspects.”

The reasons to go to war against Libya in 2011 were odd and vague. In December 2003, in the wake of the Iraqi invasion, Muammar Gaddafi surrendered his nuclear and chemical weapons. Nonetheless, there was concern that Gaddafi, still a merciless dictator, might nationalize the Country’s large oil reserves; additionally, the Country has 143 tons of gold. The government insisted that all foreign exchange go through their own central bank, a bank that was not part of the Bank for International Settlement. That concerned their trading partners, especially the oil companies. Of course there is no question that Gaddafi was a bad guy who had harbored terrorist organizations like Hezbollah and Hamas, but the reasons to intervene still seem strange.

For example, according to the UN’s Human Development Index, Libya had the highest level of well-being, the lowest infant mortality and highest life expectancy of any country in Africa. At any rate, in late 2010, a civil war broke out against the forces of Mr. Gaddafi. On February 23rd 2011, French President Sarkozy pushed the European Union to pass sanctions against Libya. Five days later British Prime Minister proposed a no-fly zone. Three weeks later the U.N. Security Council approved a no-fly zone, which the rebels had asked for because of Gaddafi’s alleged bombing of civilian populations. Less than twenty-four hours later, Libya announced it would halt all military operations in response to the U.N. Security Council resolution. Regardless, by the end of March French fighters had entered Libya’s airspace. Seven months later, on October 23rd the “liberation” of Libya was announced. Thirty thousand Libyans had died, including Gaddafi. No one can argue that Mr. Gaddafi was a force for good, but is the Country anymore stable today than it was before? Certainly, the events in Benghazi would suggest they are not.

A year later unanswered questions remain, which the Administartion has denounced as perpetrating “phony scandals.” Why had security in Benghazi been denied or ignored in the weeks leading up to the date of the attack, especially knowing it was the 11th anniversary of 9/11? Why did the combatants on the roof of the annex not receive military support? Why would the Secretary of State blame the attack on a video when her own department had sent an e-mail alleging the participation of Ansar al-Sharia? Why did the White House send UN Ambassador Susan Rice to the TV talk shows to tell a deliberate lie? Why did it take two weeks for the Administration to admit the attack had been planned in advance? Why did they wait three weeks before sending the FBI to sift through the evidence at the consulate? With Drones used regularly to kill jihadists in Pakistan and Yemen, why were they not used in Libya? In a Presidential race, were lies told for political gain, or were they truly a consequence of the “fog of war?”

September 11th is a date that will live on. We can never forget the deadly attack on American soil by nineteen al Qaeda members. We must always remember the passengers in those four hi-jacked planes and their terrifying last moments as they headed for instant death. We cannot forget those who worked in the World Trade Center and the Pentagon. Neither can we forget the heroes who rushed to the crash sites, nor the many who died in the attempt to save lives. The date has added meaning, since the attack in Benghazi. Islamic jihadists have not forgotten those moments of victory over the “infidel” West. Neither should we.

Last January 23rd, before a Senate hearing committee and in response to questioning by Senator Ron Johnson (R-Wisconsin), the Secretary of State had a melt-down, blurting out: “With all due respect. We have four dead Americans. Was it because of a protest or was it because of guys out for a walk one night decided to kill some Americans? What difference, at this point, does it make?” It makes a lot of difference. The very asking of the question suggests Ms. Clinton was either in denial or she failed to understand the consequences of the murder and its’ after effects. Ms. Clinton, it makes all the difference in the world. Of course the dead are dead, but the “whys” matter. Ask the families of former U.S. Ambassador Chris Stevens, the Information Officer Sean Smith and the two Naval Seals, Tyrone Woods and Glen Doherty. Errors must be admitted. Blame should be accepted and fabrications should never be allowed.

We are a democratic republic that relies on officials, both elected and appointed, who are accountable to the people. Public office is an honor and requires people of character who respect the people and our institutions – traits that are sadly missing in much of Washington today.

Monday, September 9, 2013


Sydney M. Williams

                                                                   Thought of the Day
September 9, 2013

Balance is important. It is preferable to the alternative. Balance is needed by tight-rope walkers and by ballerinas. Balance is what accountants do with a company’s books, and it is what we all do (or should do) with our checking accounts. But balance is more than that. Our lives should be in balance. Helen Keller once wrote: “Toleration is the greatest gift of the mind; it requires the same effort of the mind that it takes to balance oneself on a bicycle.” In government, balance is constructed by merging the wants of the two parties. It demands respect, as well as toleration. It assumes we will not get everything we want. But in government, as in business and in our lives, there must also be a balance between revenues and expenditures. For that, there can be no compromise. Having promised and spent more than we can afford, Washington has lost its financial balance. Despite our printing presses, what happened in Detroit can happen in Washington, perhaps in a different form, but the effect will be the same. A loss of fiscal balance has created a political imbalance. Is the trend reversible?

In my opinion, it has been the accumulation of obligations, more than anything, that have led to the polarization that envelops Washington. In a bid to be all things to all people, we have lost the common sense that is critical to the functioning of a great republic. Typically, Presidential candidates campaigned from the fringes and governed from the center. Mr. Obama reversed that trend, campaigning from the center – as a unifier, but has governed from the fringe – as a divider. Reason has given way to emotion. Respect has morphed into name-calling. The result: a rudder-less nation sailing a head sea. Is balance attainable or even desirable when the nation is facing an issue so critical? A failure to come to resolve the fiscal issue may undermine the country’s survivability…at least as we have known it.

The roots of this problem go back three or four generations to FDR’s response to the Great Depression – the creation of an alphabet soup of at least three dozen agencies, ranging from the AAA (Agricultural Adjustment Act) to the WPA (Works Progress Administration). These agencies were designed to help guide the nation and its people through the hard days of Depression. They were based on the assumption that government could best provide the means to help the aged, the ill and the poor. Thousands of people went to work for the CCC (Civilian Conservation Corps), the FAP (Federal Art Project) and the PWA (Public Works Administration). But seven years after Mr. Roosevelt took office unemployment was still running at 15%. It was the War, not domestic policies that brought an end to the Depression. This is not to argue that there is no role for government, especially when circumstances are so dire. The question is, to borrow a phrase, where should the line be drawn? How much assistance is too much? This becomes a slippery slope. When should brakes be applied? At what point does subsistence substitute for work? When does dependency destroy personal responsibility? When does dependency compromise liberty? When does spending on entitlements crowd out the ability to fund infrastructure, education and defense? At what level do tax rates diminish economic growth?

Apart from a few politicians like Paul Ryan and Mitch Daniels, these are problems that neither Party has had the courage to address – at least not in public and certainly not in detail. The problems of debt and unfunded liabilities, which are a consequence of promises made to constituents, have been ignored by the Left and many on the Right. They have created a backlash on the part of the hard-working, tax-paying, middle class. It was this more than anything else that gave rise to the Tea Party , most of whose members reflect America’s heartland – individuals who find “coastal elites” alien, as well as their counterparts in mainstream media. Tea Party members are generally more religious; they are hard-working, middle class taxpayers, who worry about fiscal matters and a decline in moral standards, as reflected in increased unwed births. They see it in the rise of one-parent households and a culture that promotes Miley Cyrus rather than honoring Medal of Honor recipients. The “coastal elites” tend to be wealthier and often better educated (though sometimes lacking in common sense.) The concerns of the latter lie with gay rights, feminism and global warming, bans on “big” sodas and guns, restricting smoking at home, insisting on banning the words “under God” in the Pledge of Allegiance, closing Guantanamo and similar problems – not unimportant issues, but trivial in comparison to the debt and liability problems that are hurtling our way like a run-a-way freight train.

A Left-leaning media was quick to blame the Tea Party and other right-wing organizations, as responsible for the acrimonious state of politics that exists in Washington today. But I suspect the real fault lies with the other side, and the Tea Party was simply a reaction to an increasingly paternalistic state. Over the last several decades the Country has gradually tilted left. Programs, which were well-intentioned, such as Social Security, Medicare, Medicaid and now ObamaCare have created increased dependency on government. The creation of such programs was never a question of mendacity; they were examples of one’s eyes being bigger than one’s stomach. The consequence has been that unfunded liabilities have become frightening in their size. Persistent deficits (admittedly, now declining, but from record high levels) continue to increase our debt. Low interest rates have served to protect us from the full brunt of the borrowing, but that is only a temporary reprieve. The only answer the Left has is higher taxes and reductions in defense and discretionary spending. Entitlements, including welfare but excluding ObamaCare, constitute 62% of the budget. Interest expense consumes another 6%. There is not a lot left over.

The problem is compounded, in my opinion, because of a deficit in our knowledge of history, especially in terms of an understanding of our founding, the meaning of freedom, the importance of the individual and the concept of liberty. Better knowledge would cause people to be more wary of the role dependency plays in the loss of human rights. The irony is that the United States has more college graduates than ever before. However, I would argue that our young know less of our history than did our parents.

It is worth remembering that care for the poor, the sick and the elderly is not the exclusive province of Democrats. Almost 100 years ago, and sixteen years before FDR’s “New Deal,” Calvin Coolidge argued for the need of social insurance to provide for the sick, the aged and the unemployed . But in doing so, he had caveats. Coolidge emphasized the importance of character, the value of work: “…humanitarian legislation to build up character, to establish independence, not pauperism.” He stated that a democratic republic must avoid “the establishment of one class who shall live on the Government, and another class who shall pay the taxes.” Today, entitlements dominate the budget, creating dependency and leaving fewer options for our political leaders. We have become a two-tiered nation, divided between tax payers and recipients. According to a recent study by Michael Tanner and Charles Hughes of the Cato Institute, welfare recipients in 35 states get paid more than the minimum wage. In 13 states, welfare recipients receive more than double the minimum wage. And in Connecticut where I live, those on welfare receive over $25 per hour, or more than three times the minimum wage! We have reached a point from which it is hard to retreat.

Unfortunately, the Left has not taken seriously these impending problems – so obvious to those of us who think about such matters, but invisible to those who believe that ignoring this inevitable time bomb will defuse it. At the same time, the Right has had a hard time articulating their concerns, in part because of the difficulty of explaining that we all will have to expect less from government. It is always more pleasant to give than take away. To be fiscally responsible, in a world of 140-character tweets and 30 second sound bites, is equated with being against motherhood and apple pie. Nevertheless, the Right, instead of discussing the problem rationally and calmly, while suggesting sensible alternatives, has generally reacted defensively and emotionally. The wedge dividing us has been driven more deeply.

While balance in Washington and an end to partisanship is a worthy goal, the question is: should that be our primary resolve? The problems of debt and unfunded liabilities are not going to disappear. The immediate concerns may temporarily drop off the radar screen, as an improving economy generates increased tax receipts. But better economic conditions mean higher interest rates. Higher tax receipts will alleviate the deficit, but higher interest rates will negatively impact the deficit. ObamaCare will add to the problem, as it is another entitlement. Combined, these liabilities and debt threaten to capsize our ship. It won’t happen suddenly. The risk is more insidious, as the effect of this spending gradually creeps up on us.

Increased government spending will be accompanied by a corresponding loss in personal freedom, as the “Nanny” state holds sway – think “The Life of Julia.” It is axiomatic that the bigger the role the state plays in the economy, the less autonomy there is for the individual. Already, dependency has gone a long way to replacing personal responsibility, and regulations extend over ever-increasing aspects of our lives. Reversing the course may not be possible, but slowing it should be. In the meantime, don’t count on me for desiring balance in Washington, not when the stakes are so high.