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SZONE.US Forums - Business http://www.szone.us/ Business Discussion. en Wed, 08 Sep 2010 23:50:36 GMT vBulletin 60 http://www.szone.us/images/misc/rss.jpg SZONE.US Forums - Business http://www.szone.us/ Has the Liberal Economic Experiment Failed? http://www.szone.us/f65/has-liberal-economic-experiment-failed-49266/ Wed, 08 Sep 2010 08:16:04 GMT Introduction

Monday holidays always cut into our writing time, so this week we have elected to reprint one of the more interesting articles I have read recently. I think you will like it unless you are a big Obama fan, in which case, you’ll probably find it disappointing. In any event, I think this piece is spot-on as we close in on the mid-term elections.

Following that article, I will update you on the performance of Hg Capital’s Long/Short Government Bond Program which has continued its winning ways in 2010 following its record year in 2009.

The following discussion first appeared at RealClearPolitics.com last Tuesday, and it was published by CommentaryMagazine.com.

QUOTE:

The Failure of the Liberal Economic Experiment?
by James K. Glassman

The plunge in the U.S. economy in 2008 and 2009 became an irresistible opportunity to pronounce the failure of the form of capitalism that emerged at the end of the 20th century. “One had expected competition and abundance for everyone, but instead one got scarcity, the triumph of profit-oriented thinking, speculation and dumping,” said Nicolas Sarkozy, the president of France. The current crisis, he noted with a certain pleasure, signaled the end of the “illusion of public impotence” and the “return of the state.”

There was ample reason for such grave-dancing. Between July 1, 2008, and June 30, 2009, total U.S. economic output, adjusted for inflation, dropped at an annual rate of 3.8 percent—the worst 12-month decline since 1946. The unemployment rate, which started 2008 at 5 percent, had doubled by the fall of 2010. The number of jobs fell for 21 months in a row, and by May 2010 the median unemployed worker had been out of work for 23 weeks—compared with 10 weeks in the depths of the 1973-75 recession.

The quarter-century that began shortly after Ronald Reagan’s election had been widely viewed as a period in which a free-market approach had proved its superiority to state direction of economies. In the United States, cutting top income tax rates in half, reducing regulatory burdens, and spreading free trade seemed to have produced significant prosperity and remarkable stability. Between 1983 and 2008, gross domestic product grew at an average of 3.2 percent annually. Only once did output fall in a calendar year, and that was by just two-tenths of a percentage point. Inflation, interest rates, and unemployment were tame.

Then, suddenly, an asset bubble in real estate exploded, the growth and stability vanished, and the United States suffered its worst economic misery in (take your pick) 34, 53, or 71 years. So you would expect that the American public, following President Sarkozy, would see the recession as a severe setback—or even a death blow—to conservative economic policies that were aimed at limiting the power of government and liberating the private sector.

You would have expected that, and you would have been right—but only briefly. Since the beginning of 2010, a surprising reversal has occurred. Rather than supporting and encouraging government intervention to mitigate an economic calamity caused by “profit-oriented thinking,” Americans have come to believe that government has failed to fix the problem and may, in fact, have made it worse. Now it is liberal, not conservative, economic policies that are suddenly in jeopardy.

_____________

While the recession has at least bottomed out and appears technically to have ended, the recovery, by historic standards, has been anemic. Within two years of the start of every one of the three previous recessions, GDP had rebounded significantly—to 4 percentage points above where it was when the downturn began. But 31 months after the start of the current recession, GDP was still below its starting point. The employment situation is even worse. In the nasty recession of 1981-82, the economy had regained the jobs it lost within just 26 months. This time around, we still have 5 percent fewer jobs than at the recession’s start in December 2007.

What bothers the public, plain and simple, is that the steps that were taken to mitigate the recession—which involved greater government involvement, including ownership of the largest auto and insurance companies, and vastly more federal spending—have not worked.

Worse, the public believes federal action was especially unhelpful to the mass of Americans. Only 27 percent of respondents to a Pew Research Center/National Journal survey in July agreed that “government economic policies have helped [the] middle class.” A poll in June by Greenberg Quinlan Rosner Research for Democracy Corps, a Democratic organization, asked American adults to choose between two statements:

1: President Obama’s economic policies helped avert an even worse crisis and are laying the foundation for our eventual recovery.

or

2: President Obama’s economic policies have run up a record federal deficit while failing to end the recession or slow job losses.

By 49 percent to 44 percent, respondents chose Statement No. 2, and for those who identified themselves as independents, the margin was 52-38. Among independents, the results for backing a statement “strongly” were 42 percent for No. 2 and just 22 percent for No. 1.

Some politicians and economists, notably Paul Krugman of Princeton and the New York Times op-ed page, have argued that the persistent sluggishness of the economy is the result of not doing enough. Again, the public disagrees. As Jodie Allen of Pew wrote about her organization’s study: “Far from demanding that the government reinforce its efforts so as to help neglected middle and lower-income groups, a majority of the public views cutting the federal budget deficit as more important than stimulating the economy.” In June 2009, Pew found that, by 48 percent to 46 percent, Americans favored “spending more to help [the] recovery” over “reducing the budget deficit.” But in July 2010, deficit-cutting was favored over spending by an 11-point margin, 51-40.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

_____________

Government played two distinct roles during and after the crisis. The first was shoring up shaky financial institutions. On March 24, 2008, the Federal Reserve Bank of New York issued JPMorgan Chase a $29 billion non-recourse loan that allowed it to buy Bear Stearns, an investment bank on the verge of collapse. Six months later, the Fed provided $85 billion (more came later) to save AIG, the insurance giant with assets of more than $1 trillion. Congress then enacted the comprehensive Troubled Asset Relief Program, or TARP, which authorized loans and equity purchases for hundreds of institutions (mainly banks but also auto companies).

By June 30, 2010, the U.S. Treasury had disbursed $386 billion in TARP funds. Another $145 billion went to keep afloat the two government-sponsored (though ostensibly private) institutions that provide lenders with mortgage money, Fannie Mae and Freddie Mac.

How did all that work out? The Bear Stearns, AIG, Fannie Mae, and TARP dispositions were far from perfect. Robert Pozen argues in his book Too Big to Save? that too much of the federal money injected into AIG was used to bail out banks—many of them foreign—that AIG had insured against mortgage losses through credit default swaps. Those banks, he writes, could have taken a severe haircut without jeopardizing the global financial system. Also questionable was giving General Motors and Chrysler more than $80 billion (though President Bush acted honorably in keeping the automakers alive until the start of the Obama administration.) A good case can be made that automakers should have been allowed to go bankrupt through the normal legal process, with their assets passing from weak hands to strong. As for Fannie and Freddie, had perfectly sensible warnings from experts like Peter Wallison been heeded, they might not have collapsed at all, and the entire subprime-mortgage meltdown might not have occurred. So far, Congress and the president have simply kicked the Fannie-Freddie can down the road, delaying a long-term solution.

Overall, however, it has to be said that the TARP and the other financial rescues were necessary and efficient. The global financial network did face systemic failure, mainly because of a lack of liquidity, or cash to meet immediate demands. The U.S. government was able to provide that liquidity, using its authority as lender of last resort, and most of the direct beneficiaries could eventually repay their loans, with interest, as they recovered. In fact, within a year and a half after the TARP was launched, the Treasury had been repaid $211 billion—or more than half what it had put out.

The second role government played, however, was far more questionable. Instead of lender of last resort, it determined to be the spender of last resort. And this decision, more than any other, is what has led to the crisis in the liberal economic experiment.

_____________

John Maynard Keynes argued in 1933 that in a deep recession, consumers and businesses were too frightened and broke to spend and invest, so it was up to government to do the job with massive public-works projects and short-term tax cuts. Following Keynes’s theory, Congress and the White House enacted the American Reinvestment and Recovery Act of 2009, which allotted $787 billion to a potpourri of stimulus programs to invigorate the economy.

In an article in Commentary (“Stimulus: A History of Folly”) in March 2009, I recounted the discouraging history of Keynesian stimulus and predicted its failure this time out as well. The surprise, both to me and I’m sure to those who planned, advocated, voted for, and implemented the stimulus package, is just how quickly the American public came to recognize the sweeping nature of the failure.

The reasons for the failure, and for the literally depressing pessimism that the failure seems to herald, were first described 160 years ago by Frederic Bastiat in his essay “The Seen and the Unseen.” Bastiat was describing the effects of economic actions, including public spending. That spending leads to results that are “seen,” meaning, in the case of the current stimulus, the jobs of medical residents, teachers, road builders, and the like—jobs created or preserved by stimulus dollars. Then there is the matter of what is “unseen”—meaning all the money government used for those projects that has been diverted, through taxes or borrowing, from other uses.

Usually, the public is too dazzled by the seen to take account of the unseen. So politicians often get away with saying they have “created” this or that many jobs by spending taxpayers’ money. Few follow the trail back to where the money came from or project it forward to divine the consequences. That was not the case this time. Quite the opposite, in fact.

In the current crisis, advocates of stimulus and of government intervention in general have been badly hurt by two developments. First, the short-term effects of the stimulus—the “seen”—have been extremely disappointing. The stimulus was signed into law on February 17, 2009. In the preceding month, unemployment stood at 7.7 percent. A study released at the time by Christina Romer, who shortly thereafter became chair of the President’s Council of Economic Advisers, and Jared Bernstein, economic adviser to Vice President Biden, predicted that unemployment would never exceed 8 percent and would fall to 7.5 percent by June 30, 2010, if the stimulus were enacted. Without the stimulus, they claimed, unemployment would rise to 9 percent.

Instead, unemployment rose above 10 percent and was a still horrific 9.5 percent in June 2010. Perhaps a lack of stimulus spending would have made matters even worse. No one knows. You can’t do a controlled experiment. But you can understand the public reaction: We spent all this money, and got almost nothing.

Bastiat would have appreciated one of the obvious explanations for the impotence of the stimulus. In 1957, Milton Friedman argued that attempts to increase consumer demand through government spending are doomed. The reason, Friedman wrote, is that individuals make their decisions about consumption by looking at their likely income and wealth far into the future. (He called it the “permanent income hypothesis.”) If the government starts spending huge sums today, consumers foresee higher taxes and, by inference, presume that their lifetime incomes will drop because of the increased level of their tax burden.

If government spending is short-term or one-time-only, which is what the stimulus was supposed to be, then individuals might be expected to take a more benign view. But the 2009 stimulus did not take place in a vacuum. It was soon accompanied by other economic policies and proposals of the Obama administration and the Democratic Congress: health-care reform extending public coverage to 30 million new people, cap-and-trade energy proposals featuring vastly higher taxes, and the imminent expiration of the Bush tax cuts at the end of 2010.

Because of these policies, the “unseen” became “seen” in a fashion devastating to the politicians supporting them. Americans judged that the party in power intends the radical expansion of the size of government in perpetuity. That expansion will have to be paid for. There is no reason to expect very much good from the future if you are the sort of person who generates income and creates jobs. Your “permanent income” is going to decline, and your gut response will be to husband your resources.

More disastrously for the Democrats, the “unseen” became “seen” almost immediately, in the form of metastasizing budget deficits. In order to spend all that money it didn’t have, the federal government was, of course, forced to borrow. So Treasury debt held by the public has grown from an easily manageable 36 percent of GDP at the end of fiscal 2007 to a troubling 62 percent at the end of 2010. Only once in U.S. history—during and right after World War II—has the debt-to-GDP ratio ever exceeded 50 percent.

With the new health-care law and other increased spending on the horizon, the debt-to-GDP ratio will keep rising—to 66 percent in 2020 and 79 percent in 2035, under what the Congressional Budget Office calls its “extended-baseline” scenario. In a worst-case scenario (using reasonable assumptions of spending growth), the ratio may jump to about 100 percent in 2020 and nearly 200 percent in 2035, predicted the CBO.

Americans are worried about this rising debt, and they have reason to be. As the CBO puts it, “Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels.”

What does “unsupportable” mean? Interest rates—and thus borrowing costs—could rise significantly as lenders worry about America’s ability to repay. And if history is a guide, a debt-to-GDP ratio in the 100 percent range will seriously constrain the economy, according to This Time It’s Different: Eight Centuries of Financial Folly, a 2009 book by Carmen Reinhart and Kenneth Rogoff that may turn out to be the most influential analysis of the current crisis.

For the public, the worry extends beyond the debt itself to the very role of the federal government. According to Gallup, by a margin of 57 percent to 37 percent, Americans say there is “too much” rather than “not enough regulation of business by government.” Big business is unloved, but more and more, government is seen as clumsy, venal, and self-serving.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

_____________

There is no denying that the narrative about how greedy financiers caused the economic crisis still has currency. But another narrative now looms larger. It is that the government’s attempts to fix the problem through spending have been ineffectual at best and, more likely, dangerous to our economic health.

When the financial meltdown occurred, it seemed almost certain that Americans would judge that the conservative economic experiment of 1981-2008 had failed. Instead, they seem to be leaning in the opposite direction—toward a conclusion that it was the liberal economic experiment of 2009-10 that has failed.

This conclusion is not being warmly embraced so much as reluctantly conceded. Things could change. Conservatives will face a challenge later this year over whether to extend tax cuts that, at least from a “seen” viewpoint, will further increase the debt. Still, when you consider that a repudiation of free-market capitalism and what President Sarkozy called a “return of the state” appeared almost certain when the crisis broke, we should be both humbled by and thankful for this strange and constructive turn of events.

The decline in GDP came in 1991. On inflation: Between 1992 and 2007, the Consumer Price Index never increased more than 3 percent in any calendar year. By comparison, between 1967 and 1982, annual inflation was always over 3 percent and 12 times over 5 percent. Despite two recessions, annual unemployment exceeded 7 percent only once between 1986 and 2008 (7.5 percent in 1992) and was below 6 percent in 17 of the 23 years—including every full year of the George W. Bush presidency.

James K. Glassman, former undersecretary of state for public diplomacy and public affairs, is executive director of the George W. Bush Institute in Dallas and host of the weekly program Ideas in Actionon public television.
END QUOTE

Check Out Hg Capital’s Latest Performance

Earlier this year, I introduced you to the professional money managers at Hg Capital Advisors. Now that August is behind us, I wanted to update you on the performance of Hg Capital’s Long/Short Government Bond Program (LSGB), and suggest that you check it out for a portion of your portfolio. To recap this innovative strategy, the LSGB Program trades index mutual funds that track the 30-year Treasury bond, both on a long and inverse basis. I’m pleased to report that the Hg Capital LSGB Program has continued to produce impressive returns:

The Hg Capital LSGB Program posted a monthly gain of +3.94% as of the market’s close on August 31, lifting its 2010 year-to-date performance to an impressive +14.71%. And this is on top of an impressive +60.4% gain in calendar year 2009. These are actual results, net of all fees and expenses, or what we call “net to investor.”

Why has Hg’s LSGB Program been able to navigate the current market environment when other types of strategies have failed? We believe it’s because Hg’s proprietary strategy seeks only to determine Treasury bond price movements over the next trading day. Since Hg does not attempt to identify extended market trends, they have been largely unaffected by the range-bound fluctuation of Treasury yields.

Another advantage of the LSGB Program is that it has the ability to trade both long and short, which we feel gives them a distinct advantage in today’s market environment. Many economists expect us to experience at least some level of deflation in the near future, so it’s important to have the potential to participate in upward moves in bond prices.

However, we also know that interest rates are about as low as they can go and must eventually move higher. When they do, this will be bad for long-term Treasury bond prices – but Hg Capital has the potential to gain even when bond prices begin to fall. And should volatility and uncertainty become too extreme, the LSGB Program can go to the sidelines and sit in cash to await another trading opportunity.

Check Out Our Hg Capital LSGB Online Webinar

If you were unable to sit in on our live webinar featuring Hg Capital’s LSGB strategy, you can view a recorded version of this presentation on our website at the following link: http://www.halbertwealth.com/webinar.../hgwebinar.php.

It is important to remember that the Hg Capital LSGB Program is an aggressive strategy and is capable of significant volatility. As such, it should only represent the “risk capital” portion of your overall portfolio. Obviously, there’s no guarantee that Hg Capital will always make the right calls. Though the LSGB Program has produced positive monthly gains 68% of the time since its inception in 2004, this past performance can’t guarantee similar results in the future.

I urge you to consider Hg Capital’s Long/Short Government Bond Program for the aggressive part of your portfolio. We feel that having an allocation to an investment that can take advantage of both rising and falling yields on long-term Treasury bonds may make a lot of sense for investors seeking additional portfolio diversification – especially in light of predictions that the US economy may experience deflation, inflation and maybe even stagflation in the future.

If you would like to learn more about this program offered by Halbert Wealth Management (HWM), you can call us at 800-348-3601 and talk to one of our Investment Consultants, send us an e-mail to info@halbertwealth.com, submit an online request form by clicking HERE,or check out Hg Capital’s strategy and historical performance on HWM’s website. As always, be sure to read all of the Important Notes that follow my signature below.

Wishing you profits in these crazy markets,

Gary D. Halbert

More... ]]> Business Steve Boren http://www.szone.us/f65/has-liberal-economic-experiment-failed-49266/ What Bernanke Doesn’t Understand http://www.szone.us/f65/what-bernanke-doesn-t-understand-49221/ Tue, 07 Sep 2010 03:50:17 GMT 09.06.10 11:43 AM

This week’s Outside the Box is an incendiary blog written by Steve Keen on debt deflation and GDP growth. I am not certain as to his math (is he double counting debt and consumer spending?) but he does illustrate very well the problem of a deleveraging recession, which I have been writing about for a long time. This is just a different type of recession we are in. So rather than fret over the absolute certainty of the math, read this for an understanding of the nature of the problems we face. He has the direction right, I think, which is the important part for us to grasp.

Then he just now posted a second blog on Quantitative Easing, which he ends with pointing out why it might “work” but also suggests that it would lead to yet another financial bubble. Again, very Outside the Box thinking. It has me going ‘hmmm.”

Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney, and author of the popular book Debunking Economics. He has won numerous awards and is widely published in academia. Seems quite the serious guy. You can read his material at http://www.debtdeflation.com/blogs/.

Your working on Labor Day analyst,

John Mauldin

What Bernanke doesn’t understand about deflation

By Steve Keen

Bernanke’s recent Jackson Hole speech didn’t contain one reference to the key force driving the American economy right now: private sector deleveraging (here’s the previous year’s speech for comparison’s sake). The reason the US economy is not recovering from this crisis is because all sectors of American society took on too much debt during the false boom of the last two decades, and they are now busily getting themselves out of debt any way they can.

Debt reduction is now the real story of the American economy, just as real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens.

I’ve been banging the drum on this for years now, but it’s a hard idea to communicate because it’s so alien to the way most economists (and many people) think. For a start, it involves a redefinition of aggregate demand. Most economists are conditioned to think of commodity markets and asset markets as two separate spheres, but my definition lumps them together: aggregate demand is the sum of expenditure on goods and services, PLUS the net amount of money spent buying assets (shares and property) on the secondary markets. This expenditure is financed by the sum of what we earn from productive activities (largely wages and profits) PLUS the change in our debt levels. So total demand in the economy is the sum of GDP plus the change in debt.

I’ve recently developed a simple numerical example that makes this case easier to understand: imagine an economy with a nominal GDP of $1,000 billion which is growing at 10 percent a year, due to an inflation rate of 5 percent and a real growth rate of 5 percent, and in which private debt is $1,250 billion and is growing at 20% a year.

Aggregate private sector demand in this economy—expenditure on all markets, including asset markets—is therefore $1,250 billion: $1,000 billion from expenditure from income (GDP) and $250 billion from the change in debt. At the end of the year, private debt will be $1,500 billion. Expenditure is thus 20 percent above the level that could be financed by income alone.

Now imagine that the following year, the rate of growth of GDP continues at 10 percent, but the rate of growth of debt slows from 20 to 10 percent. GDP will have grown to $1,100 billion, while the increase in private debt this year will be $150 billion—10 percent of the initial $1,500 billion total and therefore $100 billion less than the $250 billion increase the year before.

Aggregate private sector demand in this economy will therefore be $1,250 billion, consisting of $1,100 billion from GDP and $150 billion from rising debt—exactly the same as the year before. But since inflation has been running at 5 percent, aggregate demand will be 5 percent lower than the year before in real terms. So simply stabilising the debt to GDP ratio results in a fall in demand in real terms, and some markets—commodities and/or assets—must take a hit.

Putting this example in a table, we get the following illustration: Variable/Year

Year 1

Year 2

Nominal GDP

1000

1100

Growth rate of Nominal GDP

10%

10%

Real growth rate

5%

5%

Inflation Rate

5%

5%

Private Debt

1250

1500

Growth rate of Private Debt

20%

10%

Change in Private Debt

250

150

Nominal Aggregate demand (GDP + Change in Debt)

1250

1250

Notice that nominal aggregate demand remains constant across the two years–but this means that real output has to fall, since half of the recorded growth in nominal GDP is inflation. So even stabilising the debt to GDP ratio causes a fall in real aggregate demand. Some markets–whether they’re for goods and services or assets like shares and property–have to take a hit.

Now let’s apply this to the US economy for the last few years, in somewhat more detail. There are some rough edges to the following table—the year to year changes put some figures out of whack, and some change in debt is simply compounding of unpaid interest that doesn’t add to aggregate demand—but in the spirit of “I’d rather be roughly right than precisely wrong”, at your leisure please work your way through the table below.

Its key point can be grasped just by considering the GDP and the change in debt for the two years 2008 and 2010: in 2007-2008, GDP was $14.3 trillion while the change in private sector debt was $4 trillion, so aggregate private sector demand was $18.3 trillion. In calendar year 2009-10, GDP was $14.5 trillion, but the change in debt was minus $1.9 trillion, so that aggregate private sector demand was $12.6 trillion. The turnaround in two years in the change of debt has literally sucked almost $6 trillion out of the US economy. Variable\Year

2006

2007

2008

2009

2010

GDP

12,915,600

13,611,500

14,337,900

14,347,300

14,453,800

Change in Nominal GDP

6.3%

5.4%

5.3%

0.1%

0.7%

Change in Real GDP

2.7%

2.4%

2.5%

-1.9%

0.1%

Inflation Rate

4.0%

2.1%

4.3%

0.0%

2.6%

Private Debt

33,196,817

36,553,385

40,596,586

42,045,481

40,185,976

Debt Growth Rate

9.6%

10.1%

11.1%

3.6%

-4.4%

Change in Debt

2,914,187

3,356,568

4,043,201

1,448,895

-1,859,505

GDP + Change in Private Debt

15,829,787

16,968,068

18,381,101

15,796,195

12,594,295

Change in Private Aggregate Demand

0.0%

7.2%

8.3%

-14.1%

-20.3%

Government Debt

6,556,391.0

6,893,467.0

7,321,592.0

8,615,051.0

10,167,585.0

Change in Government Debt

478,851.0

337,076.0

428,125.0

1,293,459.0

1,552,534.0

GDP + Change in Total Debt

16,308,638.0

17,305,144.0

18,809,226.0

17,089,654.0

14,146,829.0

Change in Total Aggregate Demand

0.0%

6.1%

8.7%

-9.1%

-17.2%

That sucking sound will continue for many years, because the level of debt that was racked up under Bernanke’s watch, and that of his predecessor Alan Greenspan, was truly enormous. In the years from 1987, when Greenspan first rescued the financial system from its own follies, till 2009 when the US hit Peak Debt, the US private sector added $34 trillion in debt. Over the same period, the USA’s nominal GDP grew by a mere $9 trillion.

Ignoring this growth in debt—championing it even in the belief that the financial sector was being clever when in fact it was running a disguised Ponzi Scheme—was the greatest failing of the Federal Reserve and its many counterparts around the world.

Though this might beggar belief, there is nothing sinister in Bernanke’s failure to realize this: it’s a failing that he shares in common with the vast majority of economists. His problem is the theory he learnt in high school and university that he thought was simply “economics”—as if it was the only way one could think about how the economy operated. In reality, it was “Neoclassical economics”, which is just one of the many schools of thought within economics. In the same way that Christianity is not the only religion in the world, there are other schools of thought in economics. And just as different religions have different beliefs, so too do schools of thought within economics—only economists tend to call their beliefs “assumptions” because this sounds more scientific than “beliefs”.

Let’s call a spade a spade: two of the key beliefs of the Neoclassical school of thought are now coming to haunt Bernanke—because they are false. These are that the economy is (almost) always in equilibrium, and that private debt doesn’t matter.

One of Bernanke’s predecessors who also once believed these two things was Irving Fisher, and just like Bernanke, he was originally utterly flummoxed when the US economy collapsed from prosperity to Depression back in 1930. But ultimately he came around to a different way of thinking that he christened “The Debt Deflation Theory of Great Depressions” (Fisher 1933).

You would think Bernanke, as the alleged expert on the Great Depression—after all, that’s one of the main reasons he got the job as Chairman of the Federal Reserve—had read Fisher’s papers. And you’d be right. But the problem is that he didn’t understand them—and here we come back to the belief problem. The Great Depression forced Fisher—who was also a Neoclassical economist—to realize that the belief that the economy was always in equilibrium was false. When Bernanke read Fisher, he completely failed to grasp this point. Just as a religious scholar from, for example, the Hindu tradition might completely miss the key points in the Christian Bible, Bernanke didn’t even register how important abandoning the belief in equilibrium was to Fisher.

To know this, all you have to do is read Bernanke’s summary of Fisher in his Essays on the Great Depression:

The idea of debt-deflation goes back to Irving Fisher (1933). Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed.

Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. ” (Bernanke 2000, p. 24)

There’s no mention of disequilibrium there, and though Bernanke went on to try to develop the concept of debt-deflation, he did so while maintaining the belief in equilibrium. Compare this to Fisher himself on how important disequilibrium really is in the real world:

We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium… But the exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…

It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave. (Fisher 1933, p. 339)

We might not be in such a pickle now if economics had started to become more of a science and less of a religion by following Fisher’s lead, and abandoning key beliefs when reality made a mockery of them. But instead neoclassical economics completely rebuilt its belief system after the Great Depression, and here we are again, once more experiencing the disconnect between neoclassical beliefs and economic reality.

For the record, here’s my “GDP plus change in debt” table for the 1930s, to give us some idea of what the next decade or so might hold if, once again, we repeat the mistakes of our predecessors. Variable\Year

1929

1930

1931

1932

1933

1934

1935

GDP

103,600

91,200

76,500

58,700

56,400

66,000

73,300

Change in Nominal GDP

6.0%

-12.0%

-16.1%

-23.3%

-3.9%

17.0%

11.1%

Inflation Rate

-1.2%

0.0%

-7.0%

-10.1%

-9.8%

2.3%

3.0%

Private Debt

161,800

161,100

148,400

137,100

127,900

125,300

124,500

Debt Growth Rate

3.7%

-0.4%

-7.9%

-7.6%

-6.7%

-2.0%

-0.6%

Change in Debt

5,700

-700

-12,700

-11,300

-9,200

-2,600

-800

GDP + Change in Private Debt

109,300

90,500

63,800

47,400

47,200

63,400

72,500

Change in Private Aggregate Demand

0.0%

-17.2%

-29.5%

-25.7%

-0.4%

34.3%

14.4%

Government Debt

30,100

31,200

34,500

37,900

40,600

46,300

50,500

Change in Government Debt

-100

1,100

3,300

3,400

2,700

5,700

4,200

GDP + Change in Total Debt

109,200

91,600

67,100

50,800

49,900

69,100

76,700

Change in Total Aggregate Demand

0.0%

-16.1%

-26.7%

-24.3%

-1.8%

38.5%

11.0%

Bernanke, B. S. (2000). Essays on the Great Depression. Princeton, Princeton University Press.

Fisher, I. (1933). “The Debt-Deflation Theory of Great Depressions.” Econometrica
1(4): 337-357.

Click here to download this post as a PDF file.

Back to the Future

(The second post)

Things are looking grim indeed for the US economy. Unemployment is out of control—especially if you consider the U-6 (16.7%, up 0.2% in the last month) and Shadowstats (22%, up 0.3%) measures, which are far more realistic than the effectively public relations U-3 number that passes for the “official” unemployment rate (9.6%, up 0.1%).

The US is in a Depression, and the sooner it acknowledges that—rather than continuing to pretend otherwise—the better. Government action has attenuated the rate of decline, but not reversed it: a huge fiscal and monetary stimulus has put the economy in limbo rather than restarting growth, and the Fed’s conventional monetary policy arsenal is all but depleted.

This prompted MIT professor of economics Ricardo Cabellero to suggest a more radical approach to monetary easing, in a piece re-published last Wednesday in Business Spectator (reproduced from Vox). Conventional “Quantitative Easing” involves the Treasury selling bonds to the Fed, and then using the money to fund expenditure—so public debt increases, and it has to be serviced. We thus swap a private debt problem for a public one, and the boost to spending is reversed when the bonds are subsequently retired. Instead, Caballero proposes

a fiscal expansion (e.g. a temporary and large cut of sales taxes) that does not raise public debt in equal amount. This can be done with a “helicopter drop” targeted at the Treasury. That is, a monetary gift from the Fed to the Treasury. (Ricardo Caballero)

The government would thus spend without adding to debt, with the objective of causing inflation by having “more dollars chasing goods and services”. This is preferable to the deflationary trap that has afflicted Japan for two decades, and now is increasingly likely in the US. So on the face of it, Cabellero’s plan appears sound: inflation will reduce the real value of financial assets, shift wealth from older to younger generations, and stimulate both supply and demand by making it more attractive to spend and invest than to leave dollars languishing, and losing real value, in the bank.

However, though this is indeed the right time to consider radical solutions, Cabellero’s proposal would do only half the required job. Focusing on the good bit, one reason we got into this predicament in the first place was because private sector, debt-based money swamped public sector, fiat money. Ultimately we need to return to the public-private money balance we had in the 1950s and early 1960s.

But if getting “Back to the Future” was all we needed to do, then our problems would already be over, because Ben’s Helicopter Drop of late 2008 has got us there already: the ratio of M0 to M2 is now almost 0.25, far higher than the 1960 level of 0.14, while the ratio to M3 is back where it was then (using Shadowstats data, which I can’t publish here since it’s proprietary).

So why aren’t we “Back To The Future” already? Why isn’t the economy booming once more, and why is inflation giving way to deflation?

Because, though the money supply is back to where it was in 1960, the debt to money ratio is utterly different. Even after Ben’s Helicopter Drop, the debt to base money ratio is almost twice what it was in 1960, and over 3 times what it was back in the Golden Days of the 1950s.

This points out the blind spot in the thinking of even progressive Neoclassicals like Cabellero, who are willing to consider unconventional policies: they don’t understand how money is created in our credit-driven economy. Because of that, they don’t appreciate how much of that credit has financed a glorified Ponzi Scheme rather than investment, nor do they comprehend the impact that private sector deleveraging is having on aggregate demand.

I’ve covered the first topic ad nauseam in my post “The Roving Cavaliers of Credit”, so I won’t repeat myself here. Instead I’ll focus on the obvious message from the above chart: if the government simply pumps its money into the system without restraining the financial system from financing speculation on asset markets, the best we can hope for is a repeat of this crisis, on an even larger scale, some years down the track. To see that, all we have to do is look at what happened back in the 1980s.

The Debt to M0 ratio, which had risen sixfold since the 1950s, went into sudden reverse as the economy imploded when the Savings and Loans fiasco ended. The growth of debt collapsed, and the State tried to rescue the financial sector from its follies by fiscal policy and boosting the money supply. That rescue ultimately succeeded when the recession of the 1990s finally ended, but since finance was emboldened rather than reformed, it simply financed two further fiascos: the DotCom madness and then the Subprime scam.

The reason why the 1990s rescue isn’t working this time stands out more clearly when you look at the changes in debt and M0 in raw dollar terms (the scale of the change in M0 is 1/5th that for the change in debt in next two graphs). In the 1990s crisis, the rate of growth of private debt slowed by 2/3rds, but it didn’t actually fall; and a quadrupling of the rate of growth of M0 (starting half a year after debt growth slowed down) was enough, after several years, to let the Wall Street party resume.

This time, the change in debt has turned solidly negative—having growth at up to $4 trillion p.a., it is now shrinking at over $2 trillion. Ben’s far larger quantitative easing (when compared to Alan’s back in 1990-94) simply hasn’t been enough to fight a private sector that is now seriously deleveraging.

QE2 could nonetheless work, if Cabellero’s plan was executed with gusto. But if all we do is effect a monetary rescue, and yet leave the finance sector untouched, then it will reborn once again as an even bigger Ponzi Scheme.

Do we really want to go through all that again?

I’ll explain two truly major financial reforms that could prevent another credit and asset bubble in a subsequent piece.

http://feedproxy.google.com/~r/John_...nderstand.aspx ]]> Business Steve Boren http://www.szone.us/f65/what-bernanke-doesn-t-understand-49221/ The Last Chapter http://www.szone.us/f65/last-chapter-49197/ Sun, 05 Sep 2010 11:08:20 GMT 09.04.10 02:49 PM

The Last Chapter
Let's Look at the Rules
Six Impossible Things
Killing the Goose
Home and Then Europe

This week you will get a kind of preview as this week's letter. I am desperately trying to finish the first draft of my book and am one chapter away from having that draft. I have promised my editor (Debra Englander) that she would see a rough draft next week, and the final version will be delivered on the last day of September. More on that process for those interested at the end of the letter. But this week's letter will be part of what will probably be the 4th or 5th chapter, where we look at the rules of economics.

There is just so little writing time left that I have to focus on that book for a little bit. I am writing this book with co-author Jonathan Tepper of Variant Perception (who is based in London), a young and very gifted Rhodes scholar with a talent for economic analysis and writing. We each write the first draft of a chapter and then go back and forth until the chapter has been much improved. Alas, gentle reader, you will only get my first draft. You will have to wait for the book to get the new, improved version. But this is the last one I have to write. And Jonathan has done all his initial chapters. We are on the home stretch.

But first, my partners at Altegris Investments have written a White Paper entitled "The New Normal: Implications for Hedge Fund Investing." It is a very instructive read. If you are in the US and have already signed up for my Accredited Investor letter, you should already have been sent a link or a copy. If not, and you are an accredited investor (basically net worth of $1.5 million or more) and would like to see the paper, or are interested in learning more about how hedge funds, commodity funds, and other absolute-return strategies might fit into your investment portfolio, I suggest you click on www.accreditedinvestor.ws and fill out the form, and a professional will get back to you. And if you live outside the US and are interested, I have partners around the world who can work with you, so you can sign up as well. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC. Member FINRA.) And now let's look at part of a chapter from The End Game.

Let's Look at the Rules

There are rules in sports. Three strikes and you're out. You have to make ten yards in four downs to get another first down. You can't touch the soccer ball with your hands.

Baseball is a confusing game for most non-Americans. There are so many rules and subtleties. I (John) confess to not understanding the rules in soccer, although I am getting better. And forget about understanding hockey.

There are rules in economics as well, they're just not as well-known. And breaking these rules has consequences for individuals, companies, and countries. Sadly, there is no independent referee who can blow a whistle and stop the game, assess a penalty, and make you obey the rules. There is, however, a market that can decide not to buy your currency or your bonds if you don't play by the rules.

We are going to look at some of the more important rules in this chapter. But, gentle reader, don't panic. These rules are fairly easy to understand if we take out the academic jargon often associated with them. And if you "get it" then it is much easier to understand the consequences of what happens when a nation violates the rules, both from a policy perspective and a personal investing point of view.

Also sadly, there is not necessarily an immediate penalty for a violation. As we saw in the last chapter, a country can rock along for a very long time before that Bang! comes along and the flag finally gets thrown. But in the fullness of time, if a country does not correct its misbehavior, the end will be full of weeping and wailing and gnashing of teeth. And a lot of finger pointing - it is always the other side's fault.

Note that the rules are the same for everyone and every country. These are basically accounting rules known as identity equations. They are like E=MC2 or F=MV (force is equal to mass times velocity). They are just true. If they are not, then a thousand years of accounting is wrong. You may not like what they say, or not like the consequences, but you have to deal with the real world, take it or leave it.

John here: in 1976, as a very young entrepreneur (no one would hire me, so I had to work for myself), I had launched my first business, and my best friend did my taxes. I thought I had sent the IRS more than enough to cover me. Then he came to me with a tax bill that was more money than I had ever seen in one place. I guess the concept that I had to pay the employer's side of Social Security had escaped my attention in my quest to simply survive, along with all sorts of alternative minimum taxes and other things I had never heard of. Reality can be a real bitch.

The importance of knowing the rules was forcefully driven home. And the rules we will now look at are every bit as important as knowing those tax laws. Even if you don't know about them, they exist and will eventually come to haunt you (whether you're an individual, a company, or a nation) if you ignore them.

The Federal Reserve and central banks in general are currently attempting a major and highly experimental operation on the economic body, without benefit of anesthesia. They are testing the theories of four dead white guys: Irving Fisher (representing the classical economists), John Keynes (the Keynesian school), Ludwig von Mises (the Austrian school), and Milton Friedman (the monetarist school). For the most part, the central bankers are Keynesian, with a dollop of monetarist thrown in here and there.

Six Impossible Things

Alice laughed. "There's no use trying," she said, "one can't believe impossible things."

"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."

- From Through the Looking Glass, by Lewis Carroll

Economists and policy makers seem to want to believe impossible things in regard to the debt crisis currently percolating throughout the world. And, believing in them, they are adopting policies that could will well lead to tragedy.

Let's look at the basic equation that summarizes a nation's Gross Domestic Product.

GDP = C + I + G + Net Exports (that is, exports minus imports)

Which is to say, the Gross Domestic Product of a country is equal to its total Consumption (personal and business) plus Investments plus Government Spending plus Net Exports. Again, this equation is known as an identity equation: it is true for all countries and times. And it is rather simple in concept but has profound implications.

Let's examine some of those implications. First, what happens if the C drops? That means that, absent something happening elsewhere in the equation, GDP is going to drop. That circumstance is typically called a recession.

Keynesian economists argue that the correct policy response is to boost the G through fiscal stimulus, allowing consumers and businesses time to adjust and recover, and to gradually remove that stimulus as the economy returns to its normal growth trajectory. And, as an added measure, it helps if the central bank will become more accommodative, with lower interest rates and an "easy-money" policy to give further stimulus to business and consumers. In most places and in most times in recent (as in 60) years, these policies have worked to help bring an economy through a recession.

There are, however, those who argue that such a policy also keeps in place the imbalances that cause the problems (such as ever-increasing growth in consumer borrowing, housing bubbles, etc.), and we'll return to that argument later in the book; but for now let's acknowledge that a boost in G provides a temporary boost in GDP. Elsewhere we will show that the boost is indeed temporary, but few will argue that it does make a short-term difference. We believe that the recent stimulus in the US, as an example, did in fact have a temporary effect and kept the US out of what might have been a depression, but not without its own costs. That debt must be repaid.

Again, the idea is to try to offset the effects of a retrenching consumer and business sector and give the overall economy time to recover. The US began to withdraw from the stimulus in the summer of 2010. And sure enough, the economy is slowing down. Only time will tell whether the economy is strong enough to return to a sustainable growth trajectory.

The hope is that with the stimulus you can give a jump-start to consumer final demand. In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. This is the demand for the gross domestic product (GDP) of a country when inventory levels are static.

Remember that for most developed economies consumer spending is a big part of the economy. In a recession, final demand (consumer spending) retreats; therefore the objective of stimulus is to get demand back on track. For economic theories that see final demand as the driving force behind growth, recessions are simply a problem of a lack of consumer spending. Get that back in gear and you the economy moves forward.

Now, in fairness to Keynes, he also asserted that governments should run surpluses in good times, something that most countries have not seemed to be able to do. In our view, one of the main faults of the Bush administration, in conjunction with a profligate Republican Congress, was that they squandered the surpluses that we now need. We will deal with Vice President Cheney's assertion that "deficits don't matter" in due course.

Before we go into the other, more profound implications of our equation, let's visit a few other topics that will give us needed insight into them.

Delta Force

There are two, and only two, ways that you can grow your economy. You can either increase your (working-age) population or increase your productivity. That's it. There is no magic fairy dust you can sprinkle on an economy to make it grow. To increase GDP you actually have to produce something. That's why it's called gross domestic product.

The Greek letter delta (?) is the symbol for change. So if you want to change your GDP you write that as:

?GDP = ?Population + ?Productivity

That is, the change in GDP is equal to the change in population plus the change in productivity. Therefore, and I'm oversimplifying a bit here, a recession is basically a decrease in production (as normally, populations don't decrease).

Two clear implications: The first is that if you want your economy to grow, you must have an economic environment that is friendly to increasing productivity.

While government can invest in industries in ways that are productive, empirical evidence and the preponderance of academic studies suggest that private companies are better at increasing productivity and producing long-term job growth.

Going to the US for a second, studies show that it is business startups that have produced nearly all the net new jobs over the last 20 years. Let's look at this analysis by Vivek Wadhwa.1

"The Kauffman Foundation has done extensive research on job creation. Kauffman Senior Fellow Tim Kane analyzed a new data set from the U.S. government, called Business Dynamics Statistics, which provides details about the age and employment of businesses started in the U.S. since 1977. What this showed was that startups aren't just an important contributor to job growth: they're the only thing. Without startups, there would be no net job growth in the U.S. economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually.

"When analyzed by company age, the data are even more startling. Gross job creation at startups averaged more than 3 million jobs per year during 1992-2005, four times as high as any other yearly age group. Existing firms in all year groups have gross job losses that are larger than gross job gains.

"Half of the startups go out of business within five years; but overall they are still the ones that lead the charge in employment creation. Kauffman Foundation analyzed the average employment of all firms as they age from year zero (birth) to year five. When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born.

"So we can't count on the Intels or Microsofts to create employment: we need the entrepreneurs."

Run through the data from around the world. Where has the vast majority of long-term net new jobs come from, even in China? The private sector. And what is the mother's milk of the private sector? Money. Investments. Angel investors. Private banking. Private offerings. Public offerings. Loans. Personal savings. Money from friends and family. Borrowing against houses. Credit cards. And anything else that provides capital to business.

(We are reminded of the improbable story of Fred Smith, the founder of FedEx, who early in the history of the company could not make payroll. So he flew to Las Vegas and wagered what little cash they had, and incredibly made enough [$27,000] to keep the company alive. Not exactly orthodox investment banking procedure, but it is illustrative of the crazy, gung-ho nature of some entrepreneurs. Eighty percent of all business startups do not exist after five years (at least in the US). We guess Fred figured he could get better odds in Vegas.)

Want to increase productivity and jobs? The best way it seems, is to encourage private business, and especially startups.

Now let's go back to our first equation. You remember,

GDP = C + I + G + Net Exports

We will spare you the mathematical rigamarole, but if you play with this equation some, you come up with the following:

Savings = Investments

That is, the savings of consumers and business are what is available for investment in businesses, which grow the economy. But there is a rather large but.

Those savings are also what finances government debt. Unless a central bank elects to print money, government debt must be financed by the private sector. That means, if the fiscal deficit is too large it will crowd out private investment. But as we have seen, private investment is what fuels productivity growth, so if you don't have enough savings to satisfy private investment needs, you are choking off productivity growth and the creation of new jobs.

Japan is an instructive example. The government debt-to-GDP ratio has risen from 51% in 1990 to over 220% by the end of 2011, absorbing almost all of the rather enormous savings of the Japanese public. And what have they gotten for their largesse? Nominal GDP is where it was 17 years ago, and there have been no net new jobs for two decades. Think about that for a moment. In 1990, many pundits were proclaiming that Japan would overcome the US in the near future. Now they have suffered two lost decades and are on their way to a third as government debt has absorbed whatever capital would have been available to private investment. (See our analysis of Japan further on.)

If you are a country facing a population decline (like Japan), to keep your GDP growing you have to increase your productivity even more. That is why we have so much to say about demographics later in the book. Population growth (or the lack thereof) is very important. Russia is facing a very serious problem over the next 20 years that will require either a significant increase in productivity or large immigration to stave off a collapsing economy. Russia's population has declined by almost 7 million in the last 19 years, to 142 million. UN estimates are that it may shrink by about a third in the next 40 years. But that's a story for another book.

Note: We are not against a healthy government sector. But when government becomes too big or absorbs too great a share of private savings, it chokes off productivity and growth. And that hurts job creation. And that is especially true when a government runs large fiscal deficits.

Back to Vice President Cheney's famous assertion that "deficits don't matter." In one sense he is right. Let's play a thought game.

Suppose we start a business that watches its income grow by $100,000 a year every year. Assuming 5% interest rates, we could borrow $1 million every year and never really encounter a problem, as our income would be growing at twice the rate of debt service. We are running a "deficit" as a business (spending more than we make), but the deficit doesn't matter, since our profits and productivity increase more than the debt service. In ten years we owe $10 million, but we are making $1 million and could actually pay down the debt in less than ten years if we stopped borrowing so much money.

For that business, deficits don't matter.

But what if interest rates rose to 10% and our profits dropped in half? Then, Houston, we have a big problem. Now our profits don't cover the interest payments. In fact, we have to borrow money just to make the interest payments. As long as friendly bankers cooperate, we can survive. And because we were so profitable for so long, they might just keep lending, assuming that things will get back to normal.

But at some point we need to start showing a profit or they will stop making those loans and suggest we sell assets, or even take them from us.

In that case, deficits matter a whole lot.

It is the same for countries. Governments cannot run deficits in excess of the growth in GDP without eventual consequences. As we saw last chapter, things go along well until Bang! bond investors lose confidence in the ability of a government to pay its debt, even if that debt is denominated in a currency the government can print! Bond investors become concerned that the currency will lose its value faster than the interest on the bond will grow. Then interest rates rise, making it even harder for the country to pay back its debt.

We all know about Greece, but let's look at the US. Our fiscal deficit for 2010 is projected to be about 9% of nominal GDP (now roughly $14.3 trillion), down from 12-13% a short while ago. The Congressional Budget Office currently projects that the deficit will still be $1 trillion in ten years. The Heritage Foundation thinks a more realistic estimate is closer to $2 trillion in just nine years. Either one is very troubling.

Dr. Woody Brock has written a very important paper on why a country cannot grow government debt well above nominal GDP without causing severe disruptions to the overall economic system.2

We are going to reproduce just one table from that piece. Note that this was Woody's worst-case assumption, adding 8% of GDP to the debt each year, and not the 9-12% we are experiencing today. The Congressional Budget Office long-range projections are growing worse with each estimate, and that assumes a very rosy 3% or more growth in the economy for each of the next five years. Under Woody's scenario, the national debt would rise to $18 trillion by 2015, or well over 100% of GDP. Take some time to study the tables, but note that we are going to focus on 2015 and not the outlier years.

Woody makes the assumption that US debt will grow about $1.5 trillion a year. That means that by 2015, even assuming an average of 2% growth of the economy, the debt-to-GDP ratio would be 110% (or 1.1 in Woody's table)

And in just another ten years, by 2025, if the deficit were not brought under control, debt-to-GDP would climb to 200%. Note that the Heritage Foundation suggests that, under current budgetary law, the deficit will grow by more than the $1.5 trillion a year that Woody projects, in the not-too-distant future.

The point here is not to predict some future catastrophe but to point out what can happen very quickly if deficits are not brought under control.

It is our contention that long before we ever get to that point (say 2020) the bond market will revolt and interest rates will rise and the results will be very unpleasant.

Killing the Goose

Governments can increase their debt as long as the increase is less than the growth in nominal GDP. It may not be a wise choice to do so, but it does not "kill the goose." That is why Cheney argued that deficits don't matter. The deficit he was commenting on was less than the growth in nominal GDP. We assume that he never thought we would see deficits of 12% (worse in some countries). But he should have.

Voters around the world are increasingly worried that governments are not only taxing the goose that lays the golden eggs but risking the very life of the goose. And unchecked deficits do in fact risk the economic life of a country. You can get away with them for a while, but at some point you have to deal with them or risk becoming Greece. Or Argentina.

Let's look at another serious implication, again using the US as our example.

A $1.5-trillion-dollar yearly increase in the deficit means that someone has to invest that much in Treasury bonds. Let's look at where the $1.5 trillion might come from. Let's assume that all of our trade deficit comes back to the US and is invested in US government bonds. That could be as much as $500 billion, although over time that number has been falling. That still leaves $1 trillion that needs to be found to be invested in US government debt (forget about the financing needs for business and consumer loans and mortgages).

$1 trillion is roughly 7% of total US GDP. That is a staggering amount of money. And again, that assumes that foreigners continue to put 100% of their fresh reserves into dollar-denominated assets. That is not a safe assumption, given the recent news stories about how governments are thinking about creating an alternative to the dollar as a reserve currency. (And if we were watching the US run $1.5-trillion deficits, with no realistic plans to cut back, we would be having private talks, too.)

There are only three sources for the needed funds: either an increase in taxes or people increasing savings and putting them into government bonds or the Fed monetizing the debt, or some combination of all three.

Leaving aside the monetization of debt (for a later chapter), using taxes or savings to handle a large fiscal deficit reduces the amount of money available to private investment and therefore curtails the creation of new businesses and limits much-needed increases in productivity. That is the goose we will kill if we don't deal with our deficit.

It is time to hit the send button, as this letter (and chapter) is getting long. But next week we will pursue this theme. We will see why trade deficits matter, how these problems affect currencies, and why everyone can't export their way out of the problem at the same time, which may be the most contentious of all future problems.

As Ollie said to Stan (Laurel and Hardy), "Here's another nice mess you've gotten me into!" A nice mess indeed.

Home and Then Europe

I got back from LA yesterday. We went out to look at the new web sites (among a lot of other things). They are coming along very nicely. Tiffani and I are quite excited. New look and feel, but more importantly, a new ability to serve you, with reader forums, audio podcasts, a better search engine, and so much more. It is really coming together. Right now it looks like we will be "live" before the end of the month.

I leave for Europe in about eight days and will be there for two weeks. Amsterdam, Malta, Zurich, Mallorca (with my partners from Absolute Return Partners in London, at Neils Jensen's fabulous mountain home overlooking the ocean, and joined by Enrique Fynn, my Latin American partner – I can assure you the whole weekend will be strictly business!). Then it's Copenhagen for open meetings and a dinner with the team from Jyske Bank (Thomas and Lars), and then on to London.

I will be speaking in Houston October 1, at a public forum. You can sign up at www.streettalklive.com.

When Tiffani became pregnant, we decided we would just adjust our lives so she could continue working and still be a mother (Dad desperately needs her to run the business!). That means nannies come along on trips, and granddaughter Lively is at the office most days, with some time for Tiffani to be a mother every day. It is working out better than I thought it would, to be honest, and it is huge fun to watch my granddaughter grow up day by day. She sits in on meetings and is absorbing it all!

And raising a kid is a lot different these days. Nine-month-old Lively is in love with a kids' TV show called Yo Gabba Gabba. She already "dances" to the music and loves the large puppets and songs. I looked over on our flight to LA, and Lively was sitting in Tiffani's lap, with her baby headphones on (who knew they made special baby headphones?), watching Yo Gabba Gabba on an iPad! Is this a happy baby or what?

For the record, that picture is from an iPhone. The new one is 5 megapixels. And sometime I will write about my iPad. I love it. It is now my favorite toy. I can so see not needing a heavy laptop in the future. The iPad is a game changer. I know other guys are coming out with cool competitive products, and I cheer them on. Apple will have to make this even cooler or lose out. Video chat? Cameras? My phone? Skype or the equivalent? Can we get a decent version of Word? Powerpoint? Excel? Unchain me!

Oh, and coming to an iPhone and iPad near you as soon as we can: the Mauldin apps. Way cool.

Your wondering how it is possible to have so much fun analyst,

John Mauldin

[1] Vivek Wadhwa is an entrepreneur turned academic. He is a visiting scholar at the School of Information at UC Berkeley, a senior research associate at Harvard Law School, and director of research at the Center for Entrepreneurship and Research Commercialization at Duke University.

[2] If you have not read Dr. Brock's paper, or would like to read it again, it is at http://www.investorsinsight.com/blog...gdp-ratio.aspx

http://feedproxy.google.com/~r/Thoug...t-chapter.aspx ]]> Business Steve Boren http://www.szone.us/f65/last-chapter-49197/ A Whale of a Lawsuit for SeaWorld http://www.szone.us/f65/whale-lawsuit-seaworld-49172/ Fri, 03 Sep 2010 20:47:01 GMT A Whale of a Lawsuit for SeaWorld

In the wake of a $75,000 fine levied against SeaWorld Orlando for safety violations related to a trainer's death, a New Hampshire couple is suing the theme park, claiming their 10-year-old son suffered emotional distress from witnessing the tragedy.
In February, the killer whale named Tilikium grabbed Dawn Brancheau's long hair as she lay on a cement slab and dragged her into the pool. The cause of death was drowning and traumatic injuries.
Suzanne and Todd Connell's lawsuit seeks unspecified damages and alleges that their son, Bobby, "saw the look of horror and desperation on Dawn's face as she was swimming for her life." The family claims the boy has been plagued by gruesome nightmares ever since.
Read more now.

Center for Individual Freedom. based in Alexandria, Virginia, is a nonprofit, 501(c)(4) corporation that relies on private financial support from individuals, associations, foundations and corporations. For more information, please call us at 703-535-5836. ]]> Business Steve Boren http://www.szone.us/f65/whale-lawsuit-seaworld-49172/ U.S. Drawdown From Iraq Leaves Void http://www.szone.us/f65/u-s-drawdown-iraq-leaves-void-49072/ Thu, 02 Sep 2010 15:25:29 GMT and sign up for their free intelligence reports. Image: http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/john_5F00_mauldins_5F00_outside_5F00_the_5F00_box/OTB_5F00_Special_5F00_090210_5F00_3F5B72B7.jpg ...]]> 09.01.10 10:23 PM

The U.S. withdrawal date has come and gone. What will post-withdrawal Iraq look like? Can the Iraqi security forces fill the void? How will Iran exploit the diminished U.S. presence? To understand the answers to these questions you need a perspective the is to the point and contains no bias. In today's Outside the Box I'm including a insightful video from the analysts at STRATFOR, a global intelligence company.

This region matters, and STRATFOR keeps you informed. and sign up for their free intelligence reports.

http://feedproxy.google.com/~r/John_...aves-void.aspx ]]> Business Steve Boren http://www.szone.us/f65/u-s-drawdown-iraq-leaves-void-49072/ <![CDATA[The Slowing Economy & the Fed’s Dilemma]]> http://www.szone.us/f65/slowing-economy-fed-s-dilemma-48961/ Wed, 01 Sep 2010 02:23:36 GMT IN THIS ISSUE:

1.   The Economic Slowdown Continues

2.   Confidence & Employment Remain in Retreat

3.   Bernanke Announces Fed’s Latest Plan

4.   Is Obama Planning a “September Surprise”?

Introduction

We will touch several bases this week, including the latest mostly disappointing economic reports, which confirm that the recovery is losing steam. We will also review Fed Chairman Ben Bernanke’s latest speech and his plan to deal with the slumping economy.

And finally, I will briefly touch on the political front. The Democrats are plunging in the polls, and a Republican takeover of the House of Representatives looks like a given. The Senate could now be in play as well. All this raises the question as to whether President Obama will pull out some kind of “September Surprise” as a last-ditch effort to change the mood of the voting public.

Stranger things have happened, but I don’t want my readers to be surprised if Obama uncorks something unexpected over the next month. You will find that discussion at the end of this E-Letter.

But before we get into the topics above, we need to revisit my E-Letter of two weeks ago regarding federal vs. private sector compensation.

Federal Worker Versus Private Sector Compensation

Most of you will recall my E-Letter of two weeks ago when I wrote about how the average federal worker makes double that of the average worker in the private sector. Remember, in 2009 the average federal (non-military) worker made over $123,000 versus just over $61,000 for the average private sector worker. Both figures include benefits such as health insurance.

Not surprising, we had a very large response to that E-Letter. Many readers were shocked that federal workers make double their counterparts in the private sector on average. Surprisingly, a number of readers were so shocked that they claimed I simply made up the salary figures and that they were false. Clearly, these folks are “selective readers” who did not note my sources.

So let me be clear: All of the salary numbers and statistics I quoted came from the Commerce Department’s U.S. Bureau of Economic Analysis annual report that was released earlier this month. The compensation numbers all came straight from the government. Numerous media outlets reported on the federal compensation levels versus those in the private sector. Among them was USA Today – you can read the story at the following link:

http://www.usatoday.com/money/econom...pay10_ST_N.htm

Some comments we received came from current and retired federal employees who said that they had never earned anywhere near the $123,000 number quoted in the article. That’s probably very true for several reasons. First, the numbers in the USA Today story are averages. That being the case, higher-end salaries tend to skew the average calculation to the upside.

Another possible reason for the feeling that these numbers are too high is that benefits are included along with the salary. While all federal employees know how much they are paid in salary, many do not know the true value of all of the retirement and health insurance benefits they receive. These benefits amounted to over $41,000 of the $123,000 average compensation.

So, no matter how you slice it, federal government employees receive a very comprehensive benefits package that is far beyond the capability of many private-industry employers to provide.

Another comment we received was that it was unfair to compare government jobs to private enterprise because: 1) government jobs often require more education and certifications; and 2) the federal government outsources a lot of lower-paid jobs. Both of these comments are generally true, but they do not explain all of the pay discrepancies between private and federal government employees.

Actually, USA Todaydid another analysis of federal job data back in March of this year that did do an apples-to-apples comparison of specific government and private sector jobs. This study found that federal workers earned higher average salaries than their private-industry counterparts in apprx. eight out of 10 specific job classifications.

The analysis, based on 2008 data published by the Bureau of Labor Statistics (BLS), found that: “Accountants, nurses, chemists, surveyors, cooks, clerks and janitors are among the wide range of jobs that get paid more on average in the federal government than in the private sector.” You can read more about USA Today’s analysis at the following link:

http://www.usatoday.com/news/nation/...eral-pay_N.htm

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The fact is that there are some occupations where private industry pays better than the government for the same job. However, for most occupations included in USA Today’s analysis, just the opposite is true.

The bottom line is, I don’t make these things up, ever. If you choose not to believe the official numbers, that is your decision. Keep in mind that this compensation report – public versus private – is published every year by the government. And the compensation advantage for federal workers widens every year.

If you would like yet another take on federal worker compensation versus that of the private sector, read the following Forbes column posted yesterday by John Tamny. He argues that because federal workers are paid so much more than their private industry counterparts, the government is sapping potential innovation from the private economy.   It’s an interesting read:

http://www.forbes.com/2010/08/27/gov...ohn-tamny.html

The Economic Slowdown Continues

Last Friday, the Commerce Department revised downward its latest estimate of 2Q GDP growth to an annual rate of only 1.6%. The previous estimate was 2.4%, and that was considerably lower than the pre-report consensus. And now that number has been further reduced to 1.6%.

The latest GDP number once again came as a surprise to many, but I warned you about this forthcoming revision in my August 17 E-Letter. As I discussed two weeks ago, the downward revision in 2Q GDP was required because more recent data showed that US imports were much higher than expected in June. Imports have a negative impact on GDP figures.

Most of the economic reports over the last two weeks have been negative, including a couple which were the worst we’ve ever seen. On August 24, the National Association of Realtors announced that sales of existing homes plunged 27.2% in July, the largest monthly decline since records have been kept.

Existing home sales totaled only 3.83 million units (seasonally adjusted) in July, down from 5.26 million the month before. The inventory of unsold homes rose 2.5% to 3.98 million units, representing a 12.5-month supply, the highest level in over a decade.

The government also reported last week that new home sales plunged 12.4% in July to a 276,000-unit annual rate – the lowest level since the Commerce Department started keeping such records in 1963.   The government also revised down its June new home sales report from an increase of 23.6% to only 12.1% as compared to May.

The inventory of unsold new homes rose to a 9.1-month supply in July, up from 7.6 in June. In a normal housing market, there is roughly a 3-5-month supply of new homes for sale. New home sales fell in every region in the country in July and have plummeted nationally by apprx. 33% since the end of April.

Many home buyers took advantage of a temporary tax credit earlier this year to save up to $8,000, but they had to sign contracts before the end of April to qualify. Many of these contracts closed in May and June, thereby causing a temporary jump in the home sales numbers.

However, many of us cautioned that the tax credits would merely accelerate home purchases a few months, rather than create net new demand for homes. With the plunge in homesales in July, it is clear that the tax credits simply accelerated buyers’ plans without creating a great deal of new demand.

Meanwhile, the home loan foreclosure rate continues to climb. Lenders repossessed 92,858 properties last month, up 9% from June and an increase of 6% from July 2009, according to foreclosure listing firm RealtyTrac, Inc.   Banks have stepped up repossessions this year to clear out the backlog of bad loans. July marks the eighth month in a row that the pace of homes lost to foreclosure has increased on an annual basis.

The Mortgage Bankers Association reported last week that 1 in 10 US households with a home mortgage are now at risk of default. The number of properties receiving an initial default notice – the first step in the foreclosure process – rose 1% last month from June, but was actually down from July of last year, according to RealtyTrac.

Does this suggest we may be seeing the worst of the housing crisis? It’s hard to say. Many homeowners around the country who have fallen behind on their payments are being allowed to stay in their homes longer. That’s partly because some lenders are reluctant to add to the glut of foreclosed homes on the market.

But at some point, these homeowners have to get current on their payments or these properties will face foreclosure as well. With unemployment remaining very high, the prospect of these homeowners catching up on their payments anytime soon looks rather doubtful.

So it remains to be seen if we have seen the worst of the housing crisis. There is no shortage of forecasters that expect home prices to fall another 10-15-20% or more before we hit bottom. With the economy now in slowdown mode, it’s hard to rule that out.

Confidence & Employment Remain in Retreat

The government’s Consumer Confidence Index fell off a cliff in June after rising for three consecutive months. The Index plunged from 62.7 in May to 52.9 in June, down 9.8 points in one month, which was far more than the pre-report consensus. In July, the Index fell another 3.9% to 50.4. While not unprecedented, that was the largest two-month slide in confidence in years.

The Conference Board’s official statement with the release of the July Consumer Confidence Index read as follows:

“Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season.”

That’s about as pessimistic as government reports get. Fortunately, the Consumer Confidence Index for August came out this morning and was up slightly to 53.5 which was above the pre-report consensus.

The independent Reuters/University of Michigan Consumer Sentiment Index has also experienced a huge decline over the last few months. This index plunged from 76.0 in June to 68.9 in July, much worse than expected. This key index fell again in August to 68.9 which was also worse than expected.

With consumer spending accounting for apprx. 70% of GDP, these confidence numbers give little hope of a rebound anytime soon.

Fortunately, not all the economic news has been bad over the last few weeks, but what little good news we did see was not all that heartening. The Index of Leading Economic Indicators (LEI) rose 0.1% in July. This index has been essentially flat over the last four months after rising nicely in the first few months of this year.

Yesterday, the government reported that personal income rose 0.2% in July, and personal consumption expenditures rose 0.4% last month.   Both numbers were in-line with pre-report expectations.

Durable goods orders (big ticket items) rose 0.3% in July after falling 0.1% in June, but that was only because of a 76% jump in demand for commercial aircraft. Minus transportation, July durable goods orders fell 3.8% - very disappointing.

On the unemployment front, we are again back to disappointing news. Weekly “initial claims” for unemployment benefits remain very high. While Obama administration officials predicted earlier this year that we had turned the corner on unemployment, the data over the last month has been very disappointing.

Over the last four weeks, the number of persons filing for unemployment has been: 473,000 last week, 504,000 the previous week and 484,000 and 482,000 respectively in the two prior weeks. That’s a four-week average of 487,000. At this rate, the official unemployment rate could be back up to 10% or more fairly soon.

And as always, keep in mind that the government’s official unemployment rate does not include those that have given up on looking for work. If we include those out of work Americans, the real unemployment rate is north of 15%. And just for the record, according to the Labor Department, 2.5 million Americans have lost their jobs since President Obama signed into law his $862 billion stimulus package last year.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Bernanke Announces Fed’s Latest Plan

Fed Chairman Ben Bernanke gave a much awaited speech at the annual Economic Symposium in Jackson Hole, Wyoming last Friday. Having admitted recently that the economy is indeed slowing to below the Fed’s earlier forecasts, there was a great deal of interest in this speech and what steps the Fed was prepared to take in an effort to stimulate the faltering economic recovery.

Bernanke admitted in his speech that the US economy has decelerated in recent months, that unemployment remains too high, and that bank credit remains “tight.” Bernanke voiced his concerns regarding the unprecedented budget deficits we’re running, saying that: “Managing fiscal deficits and debt is a daunting challenge…” He added that the economy is still very vulnerable to shocks. (See my August 24 E-Letter for more information on possible shocks.)

As for what the Fed would do to help boost the economy, Bernanke said the Fed is prepared to make additional large-scale purchases of securities, most likely US treasuries, if the economy continues to deteriorate. You may recall that the Fed – in an unprecedented move – purchased $1.5 to $2 trillion of mostly mortgage-backed securities from big banks during the height of the credit crisis. Now, apparently, the Fed is prepared to buy even more.

The markets have worried for much of the last year that the Fed would have to unload these massive securities positions at some point, as well as raise interest rates. But based on Bernanke’s speech last Friday, the Fed has signed-off for more large purchases (ie – more “quantitative easing”) if need be in the months ahead, and keeping interest rates extremely low.

Bernanke noted several options the Fed may use to lower interest rates even further in the months ahead. He suggested that lower interest rates could trigger more spending by Americans, even though it would make dollar-denominated assets less attractive to investors. Frankly, I think Bernanke is engaging in wishful thinking if he believes incrementally lower rates will spur significantly higher consumer spending.

There was one other option Bernanke put out there that few in the media paid attention to, but one that might actually work. Bernanke acknowledged that the greatest problem for the recovery is the lack of willingness of the banks to lend (I have made this very point all year). Banks have hundreds of billions of deposits sitting at the Fed earning 25 basis points in risk-free interest, which the Fed calls the IOER rate (“interest on excess reserves” rate). Bernanke said:

“The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero. On the margin, a reduction in the IOER rate would provide banks with an incentive to increase their lending to nonfinancial borrowers or to participants in short-term money markets, reducing short-term interest rates further and possibly leading to some expansion in money and credit aggregates.” [Emphasis added.]

The fact that Bernanke would threaten to lower – or even eliminate – the 25 basis points in interest it pays to banks that hold reserves at the Fed clearly means that they are extremely worried about deflation. Obviously, my E-Letter last week – “Inflation, Deflation or Stagflation?” – was very timely.

Bernanke’s threat to significantly cut or eliminate the interest paid on commercial bank reserves that are parked at the Fed was a very carefully crafted warning that basically says: Start lending, or else!

While you can bet that the big banks picked up on this shot across the bow, it will only be effective if the Fed is prepared to act on it. We’ll see. The point to be taken here is that the Fed Chairman would never make such a threat unless he is clearly worried about deflation. And he will do everything in his power to make sure that outright deflation does not occur.

As I argued last week, I think we are headed into hopefully a mild bout of deflation that could last a year or longer – assuming it is only a mild bout – to be followed by an unknown period of stagflation (slow economic growth with rising interest rates and inflation).

Is Obama Planning a “September Surprise”?

With the mid-term elections just two months away and their polls dropping like rocks, the Democrats are getting desperate – as well they should be. Democrat pollsters, for the most part, have given up hope of holding their majority in the House of Representatives. Republicans are now on-track to gain 40-50 House seats easily, and 60-70 seats is not out of the question. It is now conceivable that the GOP could take the Senate back as well.

Given these dire circumstances, there is growing talk that President Obama may be planning a “September Surprise,” something radical in an effort to sway the electorate before November 2. Last Thursday, for example, former Clinton adviser and Democratic operative Bob Shrum posted an article in which he called on Obama to cut taxes significantly. Say what??

Specifically, Shrum advised the president to make the Bush tax cuts permanent for all but the top 2%; then he recommended that Obama give a new tax cut to those in the middle class; and he recommended permanently capping the tax rate on capital gains and dividends at 15%. Wow – that’s really something coming from one of the most influential liberal Democrats!

Shrum added, “This wouldn’t be an ideologically pure exercise in economic justice. But it’s a pragmatic [last ditch] measure that could boost markets, sending a powerful, positive signal to voters.” You can read the full article in the links at the bottom of this E-Letter.

In another vein, there are rumors that Obama might order Fannie Mae and Freddie Mac to unilaterally reduce mortgage payments for the millions of homeowners who are under water or behind on their payments. This could mean tens of billions of taxpayer dollars going to those who can’t afford their mortgages. Again, this is just a rumor, but you never know.

And finally, there are those in the Democratic party who are calling on President Obama to announce a huge new Stimulus II. They know the president doesn’t have the votes to pass another new stimulus bill, but they believe his support of it would sway many voters in November. I, on the other hand, think this would be political suicide given the public’s concerns about huge deficits.

I have no idea whether President Obama will announce a September Surprise, but he certainly knows that his party is going to get lambasted on November 2. So, don’t be surprised if he makes some bold moves in the next few weeks…. Remember, you heard it here first.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Bob Shrum - What Obama should do now
http://theweek.com/bullpen/column/20...-should-do-now

Health Care Reform Has Endangered the Democrats
http://www.realclearpolitics.com/hor...endange_1.html

More... ]]> Business Steve Boren http://www.szone.us/f65/slowing-economy-fed-s-dilemma-48961/ America’s Greatest Wealth Creation Engine http://www.szone.us/f65/america-s-greatest-wealth-creation-engine-48896/ Tue, 31 Aug 2010 01:43:07 GMT 08.30.10 02:08 PM

Those who know me well know that I am in incurable optimist. I think the world is going to be better in ten years than it is today. I thought that 20 years ago and 10 years ago and expect to think that 10 years from now. Part of that reasoning comes from the accelerating pace of change in the technology world. The next 10 years will see more change than the last 20-30 years combined!

And that means opportunity. Yes, with ups and downs and twists, but opportunity nonetheless.

This week’s Outside the Box is a short essay from my friend Alex Daley who writes the letter Casey’s Extraordinary Technology. I have had the pleasure of spending time and corresponding with Alex, and he is one of the smartest guys I have ever met. Alex had a VERY senior position at Microsoft and has a serious range of experience. In his varied career, he has worked as a senior research executive, a software developer, project manager, senior IT executive, and technology marketer. Aside from his technological prowess, Alex has been involved in numerous startups as an advisor to venture capital companies and a successful angel investor in his own right, with a long history of spectacular investment successes. Every month, he analyzes and recommends the best tech stocks to get in now – from biotech firms to cyber-security providers with innovative solutions.

You can get a free trial subscription to his letter, which I find very valuable in keeping me up to date on what is going on as well as providing some direction (his portfolio has done well!). Click on the link if you are interested. Read more here.

Your paying attention to tech analyst.

John Mauldin

America’s Greatest Wealth Creation Engine

by Alex Daley and Doug Hornig

To judge by the headlines, you might think we Americans have lost the ability to create wealth.

The stock market is floundering, even after flatlining for a decade. The overall economy is in the doldrums. Domestic heavy industry has all but disappeared. Real estate has crashed. The airlines, the automakers, the banks, all have gone to Washington, begging bowl in hand, demanding handouts from a government that, like the average citizen, is drowning in debt.

Bad news abounds, no doubt. Yet, amid all the doom and gloom, it’s easy to overlook the fact that the real engine of growth in the modern world is chugging right along.

Easy because many investors have turned their attention intently in the direction of interest rates and housing starts and the pontifications of Ben Bernanke, failing to notice that one of the markets they left behind is now leaving them behind.

Over the past decade, while the overall market was weakly limping along, these companies have been steadily growing revenues, adding jobs, and spewing profits. At the same time as brash startups were reinventing news, entertainment, communication, medicine, and virtually every other aspect of our work and home lives, promising to deliver still more growth even in this weak economy.

We’re talking about technology, of course.

Technological development is impersonal and implacable. It cares not who controls Congress or chairs the Fed. It has been the stuff of American life for a century – from the assembly line to the smartphone. Most importantly, it’s done what a successful segment of the economy is supposed to do, bring about prosperity by adding to the tangible wealth of the country.

And it did so the old-fashioned way, by creating things useful to society.

It made money for the innovators who were able to parlay their intellectual property into products that people wanted to buy. It made money for the people who worked for the innovators. It made money for companies, and their employees, that increased efficiency by integrating technological advances into their businesses. And it made money for investors who backed the leading lights in the field.

Tech, in short, has not only raised everyone’s standard of living, it has created wealth. Lots of wealth. And it continues to do so today, right through all of our economic turmoil.

One incredibly simple measure of the prosperity created is market capitalization, the sum total of the wealth held by investors.

Thirty years ago, in 1980, the entire stock market boasted only three mega-companies, i.e., those with market caps in excess of $40 billion (the equivalent of $100 billion today, in inflation-adjusted dollars): Exxon, IBM, AT&T.

Those three are still with us, and all still boast $100B+ caps. But they are joined by no fewer than 21 other U.S. companies. Taken together, the 24 have a collective market cap of $3.8 trillion.

Technology allowed this to happen.

Consider that in 1980, five of the top 24 – Apple (#2), Microsoft (3), Cisco (15), Google (19), and Oracle (23), tech companies all – either hadn’t gone public or didn’t even exist.

Intel (21) was around, but almost no one had noticed. IBM (7) was an industry leader then, but only as the primary maker of clunky mainframes. Hewlett-Packard (24) had yet to introduce either inkjet or laser printers. Walmart (4) was still dreaming of the ultra-efficient, automated distribution system that would transform its business.

The contrast between the old and the new could not be more stark.

From the 1980s to today, General Motors has slid steadily downward, racking up billions in losses that culminated in a painful bankruptcy/bailout. Over the same period, a handful of geeks from Seattle grew their dorm-room startup, Microsoft, into a global software empire with over $60 billion per year in revenue. Along the way, the company turned four employees into billionaires and an estimated 12,000 into millionaires, while amassing some $250 billion in equity for shareholders.

In 1990, Countrywide Credit emerged as the nation’s leading mortgage banker. That same year, networking company Cisco Systems went public at a split-adjusted $0.08 per share and helped to usher in the Internet age with its routers and switches. Countrywide disappeared into Bank of America in 2008, after its credit rating was slashed to “junk” by Standard & Poor’s; Cisco now employs over 65,000 people and has created over $120 billion in market value.

Over the past 10 years, the airlines posted loss after loss, received numerous government bailouts, and saw the XAL airline stock index fall from 175 to 35, erasing billions in shareholder value. Meanwhile, a little Silicon Valley firm with a rather silly name, Google, built a $25 billion a year advertising behemoth and rocketed its market cap to over $140 billion.

And the list goes on.

Dell computers are still widely known for their “Dude, you’re getting a Dell!” ad campaign, but it’s been more like, “Dude you’re getting $23 billion since your 1988 coming-out party!” Global electronic storage leader EMC has gone from a tiny outfit when it went public in 1986 to $37 billion today. And that’s not including its subsidiary VMware, spun off on its own and now valued at some $25 billion. Since 2000, biotechnology leader Celgene has added over $20 billion in wealth to its shareholders’ pockets.

It isn’t just the behemoths, either. Smaller companies across the industry, and straight through America’s supposed lost decade, have granted themselves licenses to print money. Since its 2002 IPO, for example, Netflix has built up a $5.6 billion market cap. Computer graphics chip maker NVIDIA has conjured $5.8 billion in new wealth since its 1999 public debut. Boating equipment supplier Garmin reinvented itself last decade through GPS navigation systems, to the tune of $5.8 billion.

Even today, as we struggle through what many have labeled the next great depression, technology keeps on creating fortunes. Founded in 2000 and IPO’d in 2009, restaurant software pioneer OpenTable has put on weight to the tune of nearly $1 billion in market cap and is still growing furiously. Network security outfit Fortinet, also founded in the doldrums of 2000 and taken public just last year, has secured some $1.1 billion for its shareholders and the fast-growing new market it created.

Sure, the easy-money days were 1980-2000, when the tech-heavy NASDAQ Index soared from around 160 to 4,700. That’s a stunning compound annual growth rate of 18.5% for 20 years. If you managed to ride the wave trough to peak, every dollar you threw at the NASDAQ turned into 30. And the beauty of it was, you didn’t have to know silicon from soy sauce. You could have put your investment cash into almost anything.

No longer. In 2000, the balloon popped. The dotcom bust slammed into the market, the economy went into recession, and the era of indiscriminate investing came to an abrupt and well-deserved end. The NASDAQ Index remains at just about half the high-water mark established ten years ago.

Small wonder so many have lost all faith in technology.

Which is too bad. Because technology is an unstoppable force. It doesn’t grind to a halt, or even slow down, just because it falls out of favor on Wall Street. Inventors continue to innovate, entrepreneurs continue to market the resultant products, and consumers continue to buy.

Moreover, although the train has been rolling right along, it’s far from too late to get on board. Savvy tech investors may have to put in the time and effort to sort the good companies from the bad this time around, thankfully. But there are more opportunities than ever to use the sector to build personal wealth.

Some look at technology and see only the downsides. The oil spills, the loss of privacy, the ugly machinery of war. But we recognize that technological advances have, for the most part, made our lives longer, better, healthier, more comfortable, and more fun. There’s no reason to believe that that trend won’t continue. In fact, the biotech and nanotech revolutions now just getting underway promise to usher in a renaissance of such magnitude that it will likely make all our previous techno-magic seem like simple card tricks. (Although we will need to refrain from blowing ourselves up in the interim.)

So the answer to the original question is: no, we haven’t lost our ability to create wealth. At least not in one critical area for the future. And with every conceivable measure showing the rate of technological change increasing exponentially, we have accelerated it.

Looking ahead, the eightfold increase in mega-caps since 1980 is likely to seem paltry thirty years from now. More foreigners will enter the ranks; many more, since China and India presently contribute fewer than two dozen to the world’s 500 largest companies. And it’s dead certain that the market leaders in 2040 will include many firms that today are no more than a gleam in a high schooler’s eye.

As an investor, cashing in on the tech boom of the past three decades has meant finding the most promising young companies at the beginning of their trip skyward. That will also be the case in the next three.

Only the names will change.

http://feedproxy.google.com/~r/John_...on-engine.aspx ]]> Business Steve Boren http://www.szone.us/f65/america-s-greatest-wealth-creation-engine-48896/ The Dark Side of Deficits http://www.szone.us/f65/dark-side-deficits-48831/ Sun, 29 Aug 2010 02:02:10 GMT 08.27.10 07:27 PM

Secular Bull and Bear Markets
It's Not the (Stupid) Economy
The Consequences of a Credit Crisis
The Dark Side of Deficits
LA, Europe, Kansas City, and Houston

In the pre-crisis days, I used to write about things like P/E ratios, secular bull and bear markets, valuations, and all of the things we used to think about in the Old Normal. But what about those topics as we begin our trip through the New Normal? It's time to reconvene class and think through what might change and what will remain the same. I think this will be a fun read - and let me tip my hand. I come out on the side of a new secular bull that gets us back to trend - but not just yet. The New Normal has to have its turn first. (Note: this will print out longer than usual, as there are a lot of charts.)

And speaking of first, I once again need some help from readers. I will be in "jail" next week for the Muscular Dystrophy Society. I need you to help bail me out. You can go to https://www.joinmda.org/downtowndallas2010/johnm and make a donation to help kids and families who really need help in these difficult times, and also help sponsor research that will eventually cure this disease. If you follow the link, you can see a cute video - and then make your donation!

I thank you and I am sure Jerry's kids thank you too!

Secular Bull and Bear Markets

Market analysts (of which I am a minor variety) talk all the time about secular bull and bear cycles. I argued in this column in 2002 (and later in Bull's Eye Investing) that most market analysts use the wrong metric for analyzing bull and bear cycles.

(For the record, even though I am talking about the US stock market, the principles apply to most markets everywhere. We are all human.)

"Cycles" are defined as events that repeat in a sequence. For there to be a cycle, some condition or situation must recur over a period of time. We are able to observe a wide variety of cycles in our lives: patterns in the weather, the moon, radio waves, etc. Some of the patterns are the result of fundamental factors, while others are more likely coincidence. The phases of the moon occur due to cycles among the moon, the earth, and the sun. In other situations, though, apparent patterns are no more than the alignment of random events into an observable sequence.

All cycles have several components in common. Cycles have a start and an end, they have characteristics that repeat from cycle to cycle, and they often have an explainable cause.

Stock market observers have identified what they believe to be scores of cycles, patterns, correlations, and relationships that have spawned a seemingly endless inventory of predictions and trading schemes. Every trader has his favorite system, well-fortified with back-tested "research" and "facts." These systems all work fine until you begin to use them with real money.

The patterns are so numerous that some market experts discount all theories and acquiesce to a philosophy of randomness (that would be you, Burt!). However, just because we don't understand it, doesn't mean there's not useful information contained within a pattern.

I argue that we should use valuations and not prices as the criterion for determining secular bull and bear cycles. If you use valuations, the cycles jump off the page at you. Using prices, it is very difficult. Let's look at a table prepared by my good friend Ed Easterling of Crestmont Research. Ed co-authored the two chapters in Bull's Eye Investing on stock market cycles and has a treasure trove of charts and tables on a wide variety of investment topics at www.crestmontresearch.com. And his book Unexpected Returns is a must-read for anyone who manages money, whether their own or someone else's.

OK, the following chart shows secular bears in terms of valuations. There have been four bulls and five bears (we are in one now) since 1900. (You can see a larger chart at Ed's site, under secular cycles.)

Secular bulls begin with low valuations and continue until valuations get "too high" in terms of P/E ratios. The opposite for secular bears. The average cycle over the last 110 years lasted about 13 years. These are not short-term phenomena.

Within those longer-term secular cycles you can have so-called cyclical swings based on price, and some of those counter-trend cycles can be quite large!

The first cycle of the twentieth century was a bear. It started in 1901 with the market P/E ratio cresting at 23. Twenty years later, with the P/E ratio firmly in single digits at 5, the bear went into hibernation. Over the twenty years of that secular bear, the Dow Jones Industrial Average (DJIA) had managed to tick up from 71 at year-end 1900 to 72 at year-end 1920.

But, during those two decades, the market moves were far from calm. Annual returns from New Years' Eve to New Years' Eve ranged from -38% to +82%! The best-performing three years were +82%, +47%, and +42%. After each of those years I am sure the pundits proclaimed the death of the bear. Yet the three worst years were -38%, -33%, and -31%. As we'll see with most secular bear cycles, the period was as violent and choppy as the high seas in a monsoon. Across the 20 years in this bear cycle, 45% were positive-return years - but never more than two in a row! The 11 down years were generally singles or pairs, with only one three-year stretch at the start of the cycle. Although the average gain was +30% and the average loss was 17%, the change from beginning to end was a paltry +2% in total.

Yet during that secular bear cycle, the economy grew and earnings rose. However, P/E valuations declined and offset virtually all of the economic growth. The market's price (P) was essentially unchanged from start to finish, and E (earnings per share) rose sharply. So with the market price (P) virtually unchanged, it is clear that the decline in the P/E ratio offset the gains in earnings (E). Earnings growth is often strong in bear markets - and that growth is eroded by declining P/E ratios.

Most investors do not think of the years 1933-36 as being part of a bull cycle, as the markets did not make a new high from the 1929 high. We think of those times as the heart of the Depression. But P/E ratios rose from single digits to 19, and the market tripled in just a short time. It behooves those who are genetically predisposed to a bearish position to remember that markets have a logic of their own.

The critical factor is to notice that at the start of each bull cycle, the markets had single-digit P/E ratios, with no exception. NO secular bull market ever began with high P/E ratios, even though significant rallies often started from high P/E ratios. The lesson of history is that all periods of high valuations come to an unhappy end.

And that will be the case for cycles to come. Notice that real secular bull cycles begin with low double-digit or single-digit P/E ratios. Today the P/E on reported earnings is 16.3, down from the 42 at which this cycle started, but still a long way to go until we get to low double digits.

You hear a lot of BS on various media about forward P/E ratios being only 11.5; so if that is the case then stocks are cheap, even by my standards. But those stock touts and shills use operating earnings, something that was really never done until the 1990s, and that is a way for companies and people who want you to buy stocks or mutual funds to maintain that valuations are better than you think. Operating earnings estimates are over 39% higher than estimated as-reported earnings.

Reported earnings are real, in our pockets, what we put on our tax returns. Operating earnings are of the EBIH variety, that is Earnings Before Interest and Hype, or Earnings Before Interest and Bad Stuff (the BS of earnings). Those are the expenses they ignore because they pinky swear those mistakes will never happen again. Anybody using operating earnings on TV should have a flashing warning underneath their picture that says "stock promoter" or "cheerleader" or worse. I lose patience with such pandering.

That being said, using reported earnings estimates, by the end of 2011 stocks may be getting to the place where there is some value in the broad market, based on history. Not by a lot, but enough that the next ten years might not be a write-off, again by historical standards. Enough to make me a bull? No, because we will likely not be down close to single digits. But we will be getting there.

It's Not the (Stupid) Economy

How many times are we told by the financial "experts" that the economy drives the stock market? It's often emphasized that when the economy picks up, the stock market will follow (or even lead).

While this may be true in the short term, the data clearly shows it is not so in the long term. The economy and earnings can be rising even as the market falls or drifts sideways. Over time, the stock market is driven by two major factors: long-term earnings and price/earnings (P/E) ratios. We do recognize that the economy clearly affects long-term earnings. As a matter of fact, research demonstrates a strong relationship between earnings and nominal economic growth.

However, the most significant driver of stock market returns is the valuation embedded in the P/E ratio. Over the past century, P/E ratios have cycled from higher levels to lower levels. The range from high to low has been substantial.

Let's accept that earnings are generally growing, increasing over time. When P/E ratios are rising, the double impact of rising earnings and rising P/E's produces substantial stock market gains - secular bull markets. When earnings are rising yet P/E ratios are declining, the offsetting impact is a choppy, flat stock market with some rather large downdrafts from time to time - a secular bear market.

Does the economy matter? Yes. Does the stock market necessarily follow the economy? No. The key to knowing the longer-term direction of the market is to know the longer-term direction of the P/E ratio.

Thus, the question of the day becomes: how can we know the direction of P/E ratios?

Interestingly, average P/E ratios tend to trend over long periods of time, and markets move around them. Let's look at some charts that Ed sent to me this morning. The first is the move in P/E ratios since 1970, with Ed giving us the trendline as a dotted line. The red portion going into 2011 is based on estimated earnings. Notice that after being way below trend we are on our way (if estimates are right) to being back above.

Now, let go back to 1900 and project forward on that trend line until 2030.

Notice that earnings rise to almost $180 (in real terms), well more than double from where they are today. And that has been the trend for 110 years, so it is fairly well established. But now let's look at this same chart on a log scale, and with me adding a few lines of my own.

Now, let me explain how I have marked up Ed's graph. First, I have circled in yellow the period from about 1930 through 1940. Note that the trend growth in earnings per share was well below the smoothed line we saw in the previous graph. No surprise, we were in a deflationary depression. But the point is that we got back to trend after the war and continued merrily on our way. Those ten years were not fun, but we did recover.

Now fast forward to today. What if something like the same phenomena happened over the next 20 years? I penciled in a black line going sideways (from 2010) for about 7-9 years as earnings rise, but not as fast, and then a true boom back to the "normal" trendline by the end of 2030. And what a boom it would be to get back to the long-term trend!

The Consequences of a Credit Crisis

I have written in numerous letters that the aftermath of a credit-crisis recession is a lengthy period, maybe as much as ten years, where all sorts of markets are more volatile and there are more frequent recessions. By definition, recessions are not good for earnings. We should expect two recessions between now and the end of the decade. That is what comes with the end of a credit crisis and the ensuing deleveraging cycle.

That is going to weigh on corporate earnings. But it will do more. Think about the period from 1966 through 1982. Four recessions, volatility, and P/E ratios ending up at 7, as Business Week famously declared "The End of Equities" on its cover. Who wanted to own stocks? Investors were disgusted.

Could that happen this decade? I think it is very possible. The stock market goes sideways and P/E ratios keep marching right on down, as we go through two more recessions and people get disgusted with stocks, just like in the early '80s. Then, as we (hopefully) get our government fiscal house in order, and as new technologies kick in, we see a true boom in the 2020s! It is once again the Roaring 20s!

The Dark Side of Deficits

Two last charts from Ed. The first is the average GDP for the last 110 years, and the next is a graph of real GDP above and below that average of 3.3%. Note that GDP per capita in the 2000s was the second lowest for the last 110 years. Also that real GDP was the second lowest. Not pretty.

One could take comfort from the long perspective that the US will get back to trend GDP growth of 3.3% and that earnings will go back to trend, as I illustrated in a previous chart. That would require a decade well above trend growth to balance things out. And that is what SHOULD happen.

There is one caveat. The research of Reinhardt and Rogoff demonstrates that when the government debt-to-GDP level gets to about 90%, trend growth seems to drop by about 1%. They do not offer an explanation, just an observation. My speculation is that it might be government spending and debt crowding out private savings, not leaving enough for productive private investment.

But whatever - if we do not get control of our deficit spending, we (in the US) risk putting our growth in jeopardy. If we do indeed see trend growth slip to 2.3%, then my optimistic "we get back to trend earnings by 2030," along with a roaring bull market, is at serious risk.

Let me jump on Paul Krugman again. He writes a great op-ed in the NY Times today questioning whether we are in recovery, and then pounds the table for more stimulus money. He (and all neo-Keynesians everywhere, with too many in the government) only see the next 6-12 months. Running up debt today? No problem.

Yet we risk our future potential growth if we continue on our present track. The research is clear. If we wish avoid some pain today, we create even more pain, and not that far in the future. There are those among us who are like teenagers, wanting to make the easy choice and avoid the pain today, not worrying about the consequences down the road. Not getting our fiscal deficits under control risks the whole economy.

Let's summarize. We are still in a secular bear market. Valuations, while lower, are still not at what could be called historical cyclical bottoms. Patience is the order of the day. We will get there.

And for the record, I will probably become a bull way too early and have to endure some pain on the way to profit. Such is life.

And we risk that ultimately positive scenario if we do not get our federal fiscal house in order. If that does not happen, all bets are off. ALL BETS.

LA, Europe, Kansas City, and Houston

I was going to comment on Bernanke's speech, but this letter is near its end. Besides, what is there to really say? I have often complimented Bernanke on giving very clear speeches. This was not one of them. He was a three-handed economist (on the one hand, but on the other hand, and then on the other!) He covered every possible scenario, so no matter what happens he will have had something in the speech that was right. Oh, and he did say that more quantitative easing is on the table, even though the FOMC is deeply divided on that topic. Oh well.

I (and Tiffani, Ryan, Lively, and the nanny) have to fly to LA on Tuesday for two days of previously unscheduled meetings, and then it's back to Dallas for a speech to the local Tiger 21 group. Then, starting September 11, I fly to Amsterdam for the International Broadcasting Conference, then to Malta, Zurich, Mallorca, Denmark (speech open to public), and London, home for one day, and then off for a speech to Cambridge Brokers on the 24th. Then I'm in Houston on October 1 for another public speech.

And speaking of October, I turn 61 on the 4th. Where did the year go? It seems like we were just having my 60th birthday party a few weeks ago!

I am experiencing an interesting new period of life. Tiffani has the nanny bring Lively (now 9 months) to my home office 2-3 days a week for the day, plus at lots of other times. I had forgotten what it is like to watch a baby grow up so fast - that first crawl, the first time she pulls up, first a lot of things. I am so lucky to be able to see all that! She recognizes my voice and gives me the biggest smile. And then Lively goes home and I don't have to change diapers. Is life great or what?

Time to hit the send button. A late happy hour awaits. Have a great week. Henry turns 29 this weekend, so some of the kids will gather to wish him the best. They just keep growing up.

Your waiting to channel his inner bull analyst,

John Mauldin

http://feedproxy.google.com/~r/Thoug...-deficits.aspx ]]> Business Steve Boren http://www.szone.us/f65/dark-side-deficits-48831/ Inflation, Deflation or Stagflation? http://www.szone.us/f65/inflation-deflation-stagflation-48660/ Tue, 24 Aug 2010 22:42:58 GMT IN THIS ISSUE:

1. The Inflation/Deflation Debate

2. Why Governments Love Inflation

3. Deflation – Beyond Lower Prices

4. The Shock Doctrine

5. What You Should Be Doing

Introduction

Much has been written about the inflation/deflation debate, mostly by people who want to sell investors their particular investment solution. Fortunately, there have been a number of other, more scholarly articles as well that avoid the hyperbole and just get down to a basic analysis. However, there seems to be no general agreement on which of these scenarios may lie in our future, if not both.

Since I own an investment management firm, my staff and I often hear from clients about their concerns for the future. Right now, many are concerned about whether we’re going to experience inflation, deflation or a combination of the two in the years ahead. Thoughts of our economy becoming mired in a Japanese-like deflationary spiral fuel some concerns, while others fear that Ben Bernanke will fulfill his caricature of printing dollar bills and tossing them out of helicopters.

I have not written much on the subjects of inflation and deflation due to the glut of information already in publications and on the Internet. However, considering the feedback I’m getting from clients, I think it might be time for me to weigh in on the debate. You might be surprised at where I believe we’re headed.

In this week’s E-Letter, I’m going to discuss my own thoughts about the inflation/deflation debate. However, rather than put things on a global scale as some noted analysts have done, I think it’s more important to get down to a personal level. What does inflation or deflation mean to you, as an investor and a consumer?

The Inflation/Deflation Debate

Most of the time, debate among economists centers around Keynesian vs. Austrian, or more stimulus vs. less stimulus. Today, however, the discussion seems to be boiling down to inflation vs. deflation. Unlike some other more esoteric economic issues, the answer to the inflation/deflation question may have a more profound effect on your financial destiny than any other issue, so it’s important to be paying attention to the discussion going on in economic circles.

I think that we can all agree that, in a nutshell, inflation is the state of too few goods being chased by too much money. Deflation, on the other hand is just the opposite where there is less money chasing an abundance of goods. Inflation makes prices go higher while deflation lowers them. Back in the 70’s and 80’s when we were introduced to double-digit inflation, most of us learned to be wary of it. However, we don’t know how to react to deflation, since most of us have never seen it in action.

Actually, that’s not quite correct. Most of us have experienced deflation caused through productivity gains and lower manufacturing costs. For example, you very likely paid a lot less for your newest computer than you did for its predecessors. The same goes for most other high-tech goods such as DVD players, cell phones, big-screen televisions, etc., etc. Increased productivity and technological advances pushed prices lower even though the newer products have more features.

Likewise, moving manufacturing facilities to countries with lower labor and other costs allows for lower prices than available from domestic production, in some cases. Forgetting for a moment the political and social implications of moving jobs offshore, lowering manufacturing costs leads to a form of price deflation (think WalMart). This, along with productivity gains are the good kinds of deflation.

Considering our limited exposure to these phenomena, when the subjects of inflation and deflation come around we tend to fixate on the price of goods rather than the broader economic issues. In inflation, prices go up while in deflation, they go down, so what’s not to like about deflation? Being savvy consumers, we’d obviously like prices to go down rather than go up.

However, as we continue the analysis of inflation and deflation, it’s important to remember that we’re talking about the structural kind that affects the entire economy. For example, structural inflation and deflation affect not only prices, but also wages, production and the overall money supply. In a deflationary environment, the cost of goods would be lower, but so would your wages, most likely. Not so attractive any more, right?

Deflation also usually involves lower demand for goods and services. One reason is because of lower wages as mentioned above, but another is a tendency of consumers to wait on making purchases because there’s an expectation that the prices will be lower in the future. Thus, true deflation is typically associated with a depressed economy. In fact, the last time we experienced true deflation was during the Great Depression of the 1930s. Will history repeat itself? Only time will tell.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Why Governments Really Love Inflation

One of the biggest arguments in relation to the possibility of future inflation is that governments, it is said, love inflation. The reason for this belief is that inflation helps governments pay off current debt by increasing prices, income levels and eventually, tax revenues. As inflation pushes the GDP level higher, debt levels become a smaller percentage of GDP, making them appear to be more sustainable.

Long ago, John Maynard Keynes said the following about governments and inflation:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

It works like this: If the government borrows $1,000 today and pays it back a year from now (assuming no interest), but the economy experienced 10% inflation over that time, the purchasing power of the money paid back would be 10% less than the amount owed, or $900. Thus, while the nominal value of debt is the same or higher due to interest, the purchasing power of the debt can be reduced by a government engineering inflation.

Of course, Mr. Keynes and our example assume a rather static level of debt but that’s not what’s going on now. Our GDP is growing at an anemic pace while our national debt is on steroids. Though government spending through various stimulus programs has attempted to kick-start the economy, it hasn’t worked yet. The result is a massive amount of debt and a weak GDP, not a good combination. If inflation makes existing debt easier to repay, then a deflationary scenario while still increasing debt is a recipe for disaster. Is anyone in DC listening?

Because of the disastrous effects of the current combination of potential deflation and ever-increasing government debt, some analysts have floated the idea that the federal government will attempt to engineer some inflation in order to reduce the effect of the higher debt. However, monetary policy by itself, without accompanying economic growth, is unlikely to produce the desired result.

The more realistic course of action is that the Fed will continue to have an accommodative monetary policy primarily to escape deflation rather than trying to engineer inflation. Yet, a recent research paper by James Bullard, president of the St. Louis Fed, said that Fed chairman Bernanke’s expectation for interest rates to stay low for “an extended period of time” might actually increase the chances of deflation.

The bottom line is that while inflation may help ease the government debt burden, it has to be accompanied by economic growth. Looking at the US economy, we’re likely to have a hard time producing strong economic growth, much less growth sufficient to inflate our debt away. There are simply too many headwinds to have robust economic growth. Consumer demand is down, unemployment is high and wages are flat. Does that sound like a good combination in which to introduce inflation? Hardly.

Having said all of the above, we can’t rule out inflation entirely. However, it’s not likely to be the kind that would be very helpful to the government in repaying its debt. One possible source of inflation could be the current easy money policy. The Fed has committed to printing money for however long it takes to come out of the present mess. Another might be creditor nations requiring higher interest rates on Treasury securities as the federal government debt burden grows.

Legendary investor, Warren Buffett, has gone on record that he is definitely in the future inflation camp. In a New York Times op-ed piece a year ago, he warned of massive government stimulus combined with “greenback emissions,” which he defined as the various forms of fiscal and monetary stimulus. The result, according to Mr. Buffett, will be a falling dollar and severe inflation.

While Buffett’s prediction for inflation is unwavering, it’s not something he sees for the immediate future. Other analysts agree that fiscal stimulus won’t lead to short-term inflation because much of this money is finding its way into banks, but they aren’t lending. Eventually, however, this mountain of cash will have to make its way from bank reserves into the economy, which is likely to be inflationary. The question is when this might happen.

The Case for Deflation

Those who see a deflationary future point to the fact that US households are in a deleveraging process that will continue to sap money away from consumption. That, plus a greater propensity to actually save money could result in the situation where too many goods are chasing too little money – the official formula for deflation.

The dearth of bank lending for households and businesses is another factor in favor of deflation, according to some. Businesses need capital to grow and individuals need credit for major purchases. With banks holding to tight lending standards, when they lend at all, significant growth cannot occur, as I have pointed out often over the last several months.

One of the biggest factors I see in favor of deflation is that there is no other “piggy bank” from which to fund consumer spending. Think about it, we enjoyed economic growth in the late 1990s due to the wealth effect from a buoyant stock market. Once that bubble burst, the Fed kept monetary policy free and easy so that a housing bubble could be built.

In both situations, consumers had a ready source of cash for consumption. Today, I don’t see the source of another pot of cash for consumers to spend. While some might argue that the stock market could again be inflated to produce another wealth effect, I don’t know that the public will be buying stocks en-masse after two major bear markets in less than a decade.

As I have mentioned in previous E–Letters, Investment Company Institute (ICI) statistics show that retail investors (individuals and households) are still net sellers of equity mutual funds, not buyers. It’s going to be hard to inflate the stock market without individual investors. Thus, with wage growth essentially flat and credit hard to get, I don’t see where consumers are going to get the money to increase consumption, and this helps make the case for deflation.

Going back to our discussion of how governments love inflation, we have to also conclude that they hate deflation. That’s because in deflation, the debt is paid back with more valuable dollars in the future. While inflation benefits the debtor at the expense of the creditor, the opposite is true in deflation. Thus, with foreign governments owning so much of our outstanding debt, a deflationary scenario would actually benefit foreign holders of our debt.

That’s why Ben Bernanke and his cohorts at the Fed will do anything in their power to prevent deflation, including cranking up the printing press. Even so, I’m not sure Bernanke can stave off the deflationary dragon even with his mighty printing press. The US economy is fragile, and the stock market is susceptible to any major shock to the system.

Based on the most recent economic reports, the Fed’s easy money policy isn’t working. While it is flooding the market with liquidity, banks are not lending and most of this money is just piling up on banks’ balance sheets. Some say this is actually decreasing the money supply, which would be deflationary in itself. Thus, look for the Fed to be preoccupied with preventing a Depression-type deflationary spiral, with little regard to the inflationary pressures its policies may cause in the future.

A final note about deflation is in relation to predictions that the US will become like Japan. There are some writers and analysts who believe that the US will fall into the same deflationary trap that has had Japan in a quagmire for more than a decade. There are actually many similarities between the US situation now and Japan’s economic malaise of the 1990s, but there are also some very important differences.

Considering the various factors related to the Japanese and US economies, I don’t believe a Japan-like scenario is in store for us. The monetary policy and regulatory response to the subprime crisis was much swifter in the US than in Japan. Deterioration of asset prices, especially housing, was far more pronounced in Japan, falling by around 80% in urban areas.

There are also cultural and demographic differences. Japan has a much older population, on average, and Japanese households are also far more inclined to save than US households. While the jury is still out as to whether the US propensity to consume will continue in all demographic subgroups, I think that we can at least say that consumption will rebound at some point in time.

So, while it makes for good headlines in newspapers and online blogs, I don’t expect the US to fall into a deflationary spiral similar to Japan’s. However, that’s not to say that the US won’t experience deflation. In fact, I think it’s highly likely that deflation will occur in the near future, if we’re not already there.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Shock Doctrine

The bottom line is that the US economy is probably more susceptible to a negative event than ever before. Just looking at the Greek debt issue should prove the point. I doubt that very many economists think that, in a “normal” economic scenario, the Greek debt crisis would have caused even as much as a ripple in the US stock market. However, we now know that it did, and the primary reason was that the global economy is fragile and investors are nervous.

The situation has become such that the answer to whether we have inflation or deflation could come down to just what kind of an event might occur to trigger a movement one way or the other. There is no shortage of potential shocks to the economy and the stock market, which include:

Foreign buyers of US debt demanding higher interest rates;
Downgrade of US debt by rating agencies;
The US dollar goes into free fall, pushing up prices of commodities;
Falling back into a double-dip recession;
A spike in unemployment;
Unwinding government stimulus too slowly; and
Global food shortage due to the Russian drought.

The list could go on and on, but the important thing to remember is that the stock and bond markets are likely to behave unpredictably in the months ahead. Any news could move the stock market in one way or the other, as well as set the stage for future inflation, deflation or both.

I personally believe that we’re going to encounter a bout of deflation before any inflationary pressures take hold. I’m not talking about an extended deflationary spiral like Japan has endured, but probably enough to push the economy back down into at least a mild double-dip recession. While Bernanke and company will try their best to avoid this outcome, I just don’t think they have enough bullets in their gun to avoid the inevitable.

However, the long-term outlook is definitely inflationary as the US government tries its best to spend us into oblivion. Whether through printing money, quantitative easing or even new, unproven policies discussed by some economists, I firmly believe that we have an inflationary future ahead of us in the long term.

Even if we do eke out modest economic growth, I expect it to be paltry in comparison with past recoveries, and especially in comparison with some of the rosy scenarios predicted in some of the CBO budget projections.

And here’s where my opinion deviates from the crowd. I personally believe that we will see good, old-fashioned 1970s vintage “stagflation” before we’re done. Think about it. In the 1970s, inflation was stoked not by an overheated economy, but by the Fed’s loose money policy and skyrocketing oil prices. Inflation was high and so was unemployment, the classic definition of stagflation.

Fast forward to a year or two from now. Most economists are saying that we’ll continue to have slow growth, if any at all, so unemployment is likely to remain high. When the Fed’s easy money policy again begins to stoke inflation, I’m afraid we’re going to relive Jimmy Carter’s worst nightmare.

Worse than remembering the specter of deflation is the thought of the eventual cure. Remember that Paul Volker, now a trusted advisor to President Obama, orchestrated a tight money policy that drove interest rates through the roof in the early 1980s. Do you remember the Prime Rate hitting 21.5%? I do, and it wasn’t pleasant. Of course, CD and fixed annuity investors loved it – for a while.

What You Should Be Doing

As I noted early on, knowing about inflation, deflation or even stagflation doesn’t do you much good unless you also know how to invest your money during these economic conditions. The problem is that no one is going to ring a bell when deflation begins (some economists think it’s already here). As a result, the markets are going to be moving on any hints of inflationary or deflationary pressures.

Since I have gone on record saying that I expect deflation to be our first challenge, you need to know that deflation is generally bad for tangible assets, commodities and stocks in general. Bonds, however, tend to do well in deflationary times as they represent debt, and debt becomes more valuable in deflationary times.

Over the past year or so, I have discussed various bond programs that my firm offers, so I won’t repeat that information. If you’re interested in reviewing these programs, just refer back to my September 15, 2009, April 13, 2010 and August 3, 2010 E-Letters. If you decide to seek out individual corporate bonds or Treasury bonds, or even bond mutual funds, you need to remember that bond prices can be just as volatile as stocks in the short-term, if not more so.

If inflation does come calling, tangible assets and commodities will likely gain new respectability, as will equities. Bonds, however, begin to suffer as higher interest rates push bond yields up and prices down. We continue to believe that the actively managed equity programs we offer provide a good long-term exposure to stocks, but with the ability to move to the sidelines should we encounter a resumption of the bear market.

Gold, of course, has always been known as an inflation hedge, so it could do quite well in an inflationary environment. However, some of the calls for gold to be thousands of dollars per ounce are a bit out of line, in my opinion. Even in an inflationary environment, I advise you to keep gold to a small percentage of your portfolio.

Conclusions

If there was ever a market environment that called for the ability to go to cash and keep your powder dry while waiting for opportunities, it’s the one we’re likely facing now. During deflationary times, stocks are likely to suffer while bonds should do well. During inflation, stocks and tangible assets should do well while bonds hit the skids. However, we could find ourselves going back and forth between fear of inflation and fear of deflation in the months ahead.

I also think that you should manage your expectations for the stock market even if we experience significant inflation. Recall that this inflation may be 1970s style, produced by monetary policy and outside forces rather than an overheated economy. If the economy continues to grow slowly, if at all, stocks may be lucky to produce single-digit returns.

That’s why I continue to recommend that you check out the actively managed portfolios offered by Halbert Wealth Management (HWM). To learn more about these investment programs, give one of our experienced Investment Consultants a call at 800-348-3601 or send an e-mail to info@halbertwealth.com. You can also learn more about these programs on our website at http://www.halbertwealth.com/.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

The Road to Stagflation
http://www.minyanville.com/businessm...9730?page=full

World divides into ice-cold and red-hot economies
http://www.marketwatch.com/story/inf...nke-2010-08-22

The US is not Japan
http://money.cnn.com/2010/08/18/mark...buzz/index.htm

More... ]]> Business Steve Boren http://www.szone.us/f65/inflation-deflation-stagflation-48660/ The Importance of Start-ups http://www.szone.us/f65/importance-start-ups-48601/ Mon, 23 Aug 2010 20:03:57 GMT 08.23.10 11:22 AM

Which Are We Going To Bet On?

I knew I would be touching a raw nerve with my last two posts, on patents. But I was really surprised at the divergence of opinion. Entrepreneurs overwhelmingly supported my stance that software patents hamper innovation and need to be abolished, but friends at Microsoft, IBM, and Google were outraged at my recommendation. The big companies’ executives argued that abolishing patents would hurt their ability to innovate and thus hamper the nation’s economic growth. (They believe that companies like theirs create the majority of jobs and innovations, and they claim that without patents they cannot defend their innovations.) I am not convinced that software patents give Google any advantage over Microsoft and Yahoo, or make IBM’s databases any better than Oracle’s. But I do know one thing for sure: it isn’t the big companies that create the jobs or the revolutionary technology innovations: it is startups. So if we need to pick sides, I vote for the startups.

Let’s start with the question of who creates the jobs. This is one of the issues that I recently took Intel co-founder Andy Grove to task for, in BusinessWeek

. Grove wrote a profound essay

lamenting the loss of American manufacturing jobs. I share his concerns about jobs. But Andy’s protectionist recommendations for restoring America’s competitiveness were largely based on his flawed premise that companies like Intel create all the jobs—not the startups. I also discussed the tradeoff between bailing out companies like General Motors, AIG, and Citibank and nurturing startups in this BusinessWeek piece

. This question is more important than it may seem.

Kauffman Foundation has done extensive research on job creation. Kauffman Senior Fellow Tim Kane analyzed a new data set from the U.S. government, called Business Dynamics Statistics

, which provides details about the age and employment of businesses started in the U.S. since 1977. What this showed was that startups aren’t just an important contributor to job growth: they’re the only thing. Without startups, there would be no net job growth in the U.S. economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually.

When analyzed by company age, the data are even more startling. Gross job creation at startups averaged more than 3 million jobs per year during 1992–2005, four times as high as any other yearly age group. Existing firms in all year groups have gross job losses that are larger than gross job gains.

Half of the startups go out of business within five years; but overall they are still the ones that lead the charge in employment creation. Kauffman Foundation analyzed

the average employment of all firms as they age from year zero (birth) to year five. When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born.

So we can’t count on the Intels or Microsofts to create employment: we need the entrepreneurs. And there is an important lesson here for the states and cities that offer huge incentives

to companies like Dell, Google, and Intel to locate their operations there. The regions should, instead, be focusing on creating more startups, not providing life support to technology behemoths.

Now let’s talk about innovation. Apple is the poster child for tech innovation; it releases one groundbreaking product after another. But let’s get beyond Apple. I challenge you to name another tech company that innovates like Apple—with game-changing technologies like the iPod, iTunes, iPhone, and iPad. Google certainly doesn’t fit the bill—after its original search engine and ad platform, it hasn’t invented anything earth shattering. Yes, Google did develop a nice email system and some mapping software, but these were incremental innovations. For that matter, what earth-shattering products have IBM, HP, Microsoft, Oracle, or Cisco produced in recent times? These companies constantly acquire startups and take advantage of their own size and distribution channels to scale up the innovations they have purchased. They let the startups take the risk and prove the business models.

This raises an interesting question. Google and Microsoft have always prided themselves for hiring the cream of the crop of software developers. It is ridiculously hard to get a job at either company. But when technology’s top guns join these companies, they seem to make a smaller impact than those that don’t get hired. So would these companies be better served by releasing their most brilliant developers into the wild and arming them with seed financing to start companies? (They could negotiate partial ownership and right of first refusal on acquisition.) We would certainly get more innovation this way.

Simply put, if we are serious about lifting the economy out of its rut, we need to focus all of our energy on helping entrepreneurs. Provide them with the incentives (tax breaks and seed financing); education; and infrastructure. And gear public policy—like patent-protection laws—toward the startups. Let’s not bet on the companies that are too big to fail or too clumsy to innovate.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at the School of Information at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. You can follow him on Twitter at @vwadhwa and find his research at www.wadhwa.com.

When Did Thrift Become Bad?

By William C. Dunkelberg, Chief Economist

National Federation of Independent Business

Supporters of letting the “Bush tax cuts” expire, especially for those with incomes over $200,000 (the “rich”), argue that money given to the rich is mostly “saved” while money to the “poor” is spent 100%, thus stimulating the economy. We can infer from that position that the argument is that “savings” don't matter for the economy or that the rich somehow destroy the income they do not spend (i.e. save) and it has no impact on the economy. A Brookings report (August, 2010) reports “…most Bush tax cut dollars go to higher-income households and these top earners don't spend as much of their income as lower earners”. So, economic policy is to take money from the successful and savers and give it to those who will spend spend spend?

Savings is defined as “non-consumption”, if you don’t spend it (on government or personal consumption), it is saved, whether in your mattress, or in an insurance premium, or buying stocks and bonds or putting the money in a bank. Savings make up the pool of funds we use to finance “investment”, the creation of new productive assets like equipment, office or warehouse buildings, inventions, new vehicles for business purposes, things that raise worker productivity and income in the long haul.

If you don’t put money in the local bank (i.e. save and deploy the funds in the financial system somewhere), we can’t finance any of these investment expenditures. It’s that simple. We are already a nation of poor savers, with our consumer saving rate reaching near zero in the housing boom (p.s. new housing is counted as investment, a new asset, but it doesn’t have much impact on productivity). So, the notion that rich people waste their incomes by saving a significant percentage of it is so off the mark! We need savers, and policies that transfer income earned by the successful to those who will spend 100% of it and don’t save anything is a recipe for economic disaster.

Most small businesses when started are financed almost entirely with the savings of the entrepreneur and small firms grow and create jobs with earnings that are “saved and re-invested” in the firm. The Brookings report argues that ending the cuts will have minimal impact on small business growth because “Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets”. This “2 percent” number uses as a denominator about 29 million tax returns with schedule C business income. But most of these employ nobody, many are part-time businesses. There are only 6 million employer firms, 90 percent with fewer than 20 employees. These are the job creators and far more of them would be impacted by the expiration of the Bush tax cuts.

We have borrowed the savings of the rest of the world for years so that we could “party” and still invest in some real capital at the same time. The problem is that those lending us their savings reap the returns, not Americans, and eventually might expect to be repaid. Every time we go through these cycles, we pile on more and more debt which claims more earnings each year from investments financed by the debt (and by foreign direct and financial investment) and increases the total amount of debt that must be refinanced and repaid in the future. The longer we put off making governments and firms seeking subsidies accountable, the more devastating will be the day of “settlement”. And we all know it will come. Each “crisis” brings the day of reckoning closer.

http://feedproxy.google.com/~r/John_...start-ups.aspx ]]> Business Steve Boren http://www.szone.us/f65/importance-start-ups-48601/ PIIGS: CommoPdity Style by Matthew Bradbard http://www.szone.us/f65/piigs-commopdity-style-matthew-bradbard-48559/ Sun, 22 Aug 2010 19:10:44 GMT PIIGS: Commodity Style (http://www.investorconcepts.com/premium-content/piigs-commodity-style) by Matthew Bradbard In this article, Mr. Matthew Bradbard, the president and founder of MB Wealth Corporation analyses the current investment scenarios and opportunities for investing in Petroleum, Interest Rates, Indices, Gold, and Silver. He mentions there are good investment opportunities available for commodity investors despite the negative media coverage on countries like Portugal, Ireland, Italy, Greece, and Spain. Click here (http://www.investorconcepts.com/user/register) to sign up for your free Investor Concepts membership PIIGS: Commodity Style
by Matthew Bradbard

In this article, Mr. Matthew Bradbard, the president and founder of MB Wealth Corporation analyses the current investment scenarios and opportunities for investing in Petroleum, Interest Rates, Indices, Gold, and Silver. He mentions there are good investment opportunities available for commodity investors despite the negative media coverage on countries like Portugal, Ireland, Italy, Greece, and Spain.

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/piigs-commopdity-style-matthew-bradbard-48559/ Emerging Market GDP Growth: The Past Two Decades and Our Projections for the Next Dec http://www.szone.us/f65/emerging-market-gdp-growth-past-two-decades-our-projections-next-dec-48558/ Sun, 22 Aug 2010 19:08:12 GMT Emerging Market GDP Growth: The Past Two Decades and Our Projections for the Next Decade (http://www.investorconcepts.com/premium-content/emerging-market-gdp-growth-past-two-decades-and-our-projections-next-decade) by Monty Guild In this article, Mr. Monty Guild, the founder and investment manager at Guild Investment Management, analyses the historical growth rates of the emerging market economies and forecasts the future growth for these economies walking into the next decade. Understanding the economic growth of various fastest growing economies is essential to find the next super powers that provide potential investment opportunities after the deep financial crisis. And Mr. Guild believes India, China, and Indonesia would be on the top of the list in the next decade. Click here (http://www.investorconcepts.com/user/register) to sign up for your free Investor Concepts membership Emerging Market GDP Growth: The Past Two Decades and Our Projections for the Next Decade
by Monty Guild

In this article, Mr. Monty Guild, the founder and investment manager at Guild Investment Management, analyses the historical growth rates of the emerging market economies and forecasts the future growth for these economies walking into the next decade. Understanding the economic growth of various fastest growing economies is essential to find the next super powers that provide potential investment opportunities after the deep financial crisis. And Mr. Guild believes India, China, and Indonesia would be on the top of the list in the next decade.

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/emerging-market-gdp-growth-past-two-decades-our-projections-next-dec-48558/ Is Chapter 13 Reducing the Foreclosure Rate? by John Lounsbury http://www.szone.us/f65/chapter-13-reducing-foreclosure-rate-john-lounsbury-48557/ Sun, 22 Aug 2010 19:06:26 GMT Is Chapter 13 Reducing the Foreclosure Rate? (http://www.investorconcepts.com/premium-content/chapter-13-reducing-foreclosure-rate) by John Lounsbury In this article, Mr. John Lounsbury, Ph.D., CFP, a financial planner and investment consultant, discusses on how Chapter 13 (personal bankruptcy) can help home owners whose appraised value of their house is less than their first mortgage. He explains the parallels between the Chapter 11 (corporate bankruptcy) and Chapter 13 (personal bankruptcy). In addition, he explains more on the trends happening in this area and how it would impact the nation’s biggest banks like JP Morgan, Bank of America, Wells Fargo, and Citigroup. Click here (http://www.investorconcepts.com/user/register) to sign up for your free Investor Concepts membership Is Chapter 13 Reducing the Foreclosure Rate?
by John Lounsbury

In this article, Mr. John Lounsbury, Ph.D., CFP, a financial planner and investment consultant, discusses on how Chapter 13 (personal bankruptcy) can help home owners whose appraised value of their house is less than their first mortgage. He explains the parallels between the Chapter 11 (corporate bankruptcy) and Chapter 13 (personal bankruptcy). In addition, he explains more on the trends happening in this area and how it would impact the nation’s biggest banks like JP Morgan, Bank of America, Wells Fargo, and Citigroup.

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/chapter-13-reducing-foreclosure-rate-john-lounsbury-48557/ <![CDATA[What to Do When You Don't Have Enough to Retire]]> http://www.szone.us/f65/what-do-when-you-dont-have-enough-retire-48556/ Sun, 22 Aug 2010 19:04:02 GMT What to Do When You Don't Have Enough to Retire
by Liz Davidson

In this personal retirement planning article written by Ms. Liz Davidson, the chief executive officer of Financial Finesse, focuses on many other alternatives available to people who plan on retiring in the near future and have been adversely affected by bad timings, bad results, and bad luck. She mentions on how prioritizing, delaying retirement, finding extra income, and saving more can help one to still have a comfortable retirement after the post financial crisis.

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/what-do-when-you-dont-have-enough-retire-48556/ Seven Reasons Why Silver Could Soar http://www.szone.us/f65/seven-reasons-why-silver-could-soar-48555/ Sun, 22 Aug 2010 19:01:05 GMT Seven Reasons Why Silver Could Soar (http://www.investorconcepts.com/premium-content/seven-reasons-why-silver-could-soar) by Michael Johnston In this article, Mr. Michael Johnston, the founder and senior analyst of ETF Database, writes about the opportunities for investing in commodities like gold and silver. In the current economic environment with plunging consumer confidence and weakening of major currencies like Dollar, Euro, and Yen due to high government debt levels and budgetary crisis, gold and silver provide alternative opportunities for sound investing. In addition, he mentions the different ways an investor can play by investing and gaining exposure to these asset classes. Moreover, he recommends on investing in Silver because of its surging demand from various uses. Click here (http://www.investorconcepts.com/user/register)to sign up for your free Investor Concepts membership Seven Reasons Why Silver Could Soar
by Michael Johnston

In this article, Mr. Michael Johnston, the founder and senior analyst of ETF Database, writes about the opportunities for investing in commodities like gold and silver. In the current economic environment with plunging consumer confidence and weakening of major currencies like Dollar, Euro, and Yen due to high government debt levels and budgetary crisis, gold and silver provide alternative opportunities for sound investing. In addition, he mentions the different ways an investor can play by investing and gaining exposure to these asset classes. Moreover, he recommends on investing in Silver because of its surging demand from various uses.

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/seven-reasons-why-silver-could-soar-48555/ Aon Corporation to buy Hewitt Associates for $4.9 Billion http://www.szone.us/f65/aon-corporation-buy-hewitt-associates-4-9-billion-48554/ Sun, 22 Aug 2010 18:58:29 GMT Aon Corporation to buy Hewitt Associates for $4.9 Billion

The Aon Corporation, the Chicago, Illinois-based insurance broker, agreed to buy Hewitt Associates, the Lincolnshire, Illinois-based human resource consulting and outsourcing company, for $4.9 Billion in cash and stock deals. Aon said it expected the deal would save $355 million a year beginning in 2013. It also said that the deal would help earnings in 2011 and 2012. The deal is expected to close by mid-November of 2010. Aon was advised by Credit Suisse and the law firm Sidley Austin. Hewitt was advised by Citigroup and the law firms Debevoise & Plimpton and Paul, Weiss, Rifkind, Wharton & Garrison.

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/aon-corporation-buy-hewitt-associates-4-9-billion-48554/ Tyco Electronics agreed to buy ADC Telecommunications for $1.25 Billion http://www.szone.us/f65/tyco-electronics-agreed-buy-adc-telecommunications-1-25-billion-48553/ Sun, 22 Aug 2010 18:56:24 GMT Tyco Electronics agreed to buy ADC Telecommunications, a broadband equipment maker, for about $1.25 billion in cash. Under the terms of the deal, Tyco will pay $12.75 per ADC share, a 44 percent premium to ADC stock price of $8.85. The deal is expected to close by the fourth quarter of 2010. Tyco said it expected the deal to add to its earnings by 14 cents a share, excluding acquisition costs. Tyco was advised by Barclays Capital, while ADC was advised by Morgan Stanley. Click here (http://www.investorconcepts.com/user/register) to sign up for your free Investor Concepts membership Tyco Electronics agreed to buy ADC Telecommunications, a broadband equipment maker, for about $1.25 billion in cash. Under the terms of the deal, Tyco will pay $12.75 per ADC share, a 44 percent premium to ADC stock price of $8.85. The deal is expected to close by the fourth quarter of 2010. Tyco said it expected the deal to add to its earnings by 14 cents a share, excluding acquisition costs. Tyco was advised by Barclays Capital, while ADC was advised by Morgan Stanley.

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/tyco-electronics-agreed-buy-adc-telecommunications-1-25-billion-48553/ Reckitt Benckiser agreed to buy SSL Industries for $3.9 Billion http://www.szone.us/f65/reckitt-benckiser-agreed-buy-ssl-industries-3-9-billion-48552/ Sun, 22 Aug 2010 18:54:17 GMT *Reckitt Benckiser agreed to buy SSL Industries for $3.9 Billion* Reckitt Benckiser, the owner of consumer brands like Vanish, Lysol and Clearasil, agreed to buy SSL International, the maker of Durex condoms and Dr. Scholl foot care products, for $3.9 Billion. “It is anticipated that the acquisition will increase Reckitt Benckiser’s health and personal-care net revenues by over 36 percent to approximately £2.8 billion, one-third of the group’s total net revenues,” said Mr. Bart Becht, the chief executive officer of Reckitt Benckiser. Click here to sign up for your free Investor Concepts membershiphttp://www.investorconcepts.com/user/register Reckitt Benckiser agreed to buy SSL Industries for $3.9 Billion

Reckitt Benckiser, the owner of consumer brands like Vanish, Lysol and Clearasil, agreed to buy SSL International, the maker of Durex condoms and Dr. Scholl foot care products, for $3.9 Billion. “It is anticipated that the acquisition will increase Reckitt Benckiser’s health and personal-care net revenues by over 36 percent to approximately £2.8 billion, one-third of the group’s total net revenues,” said Mr. Bart Becht, the chief executive officer of Reckitt Benckiser.

Click here to sign up for your free Investor Concepts membershiphttp://www.investorconcepts.com/user/register ]]> Business Steve Boren http://www.szone.us/f65/reckitt-benckiser-agreed-buy-ssl-industries-3-9-billion-48552/ General Motors agreed to buy AmeriCredit for $3.5 Billion http://www.szone.us/f65/general-motors-agreed-buy-americredit-3-5-billion-48551/ Sun, 22 Aug 2010 18:52:25 GMT *General Motors agreed to buy AmeriCredit for $3.5 Billion* General Motors agreed to buy AmeriCredit for $3.5 billion in cash, in an effort to reestablish an in-house lending arm after selling GMAC in 2006. This is the first deal for GM after a government sponsored bankruptcy last year. AmeriCredit is a Fort Worth, Texas-based company with over $10 Billion in assets under management. The deal is expected to close by the fourth quarter of 2010. “This acquisition supports our efforts to design, build and sell the world’s best vehicles by expanding the financing options we can offer to consumers who want to buy G.M. vehicles,” said Mr. Edward E. Whitacre Jr., the chairman and chief executive of GM. “Adding AmeriCredit to our team will improve our competitiveness in auto financing offerings, and I am very pleased to have them on board.” Click here (http://www.investorconcepts.com/user/register) to sign up for your free Investor Concepts membership General Motors agreed to buy AmeriCredit for $3.5 Billion

General Motors agreed to buy AmeriCredit for $3.5 billion in cash, in an effort to reestablish an in-house lending arm after selling GMAC in 2006. This is the first deal for GM after a government sponsored bankruptcy last year. AmeriCredit is a Fort Worth, Texas-based company with over $10 Billion in assets under management. The deal is expected to close by the fourth quarter of 2010. “This acquisition supports our efforts to design, build and sell the world’s best vehicles by expanding the financing options we can offer to consumers who want to buy G.M. vehicles,” said Mr. Edward E. Whitacre Jr., the chairman and chief executive of GM. “Adding AmeriCredit to our team will improve our competitiveness in auto financing offerings, and I am very pleased to have them on board.”

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/general-motors-agreed-buy-americredit-3-5-billion-48551/ Disney agreed to purchase Playdom for $763.2 Million http://www.szone.us/f65/disney-agreed-purchase-playdom-763-2-million-48550/ Sun, 22 Aug 2010 18:50:06 GMT *Disney agreed to purchase Playdom for $763.2 Million* The Walt Disney Company became one of the leading playing in the booming social gaming space by purchasing Playdom, a Mountain View, CA-based social gaming business for $763.2 Million. Playdom’s revenue in the year 2009 accounted to around $50 Million. In addition, Playdom is the No. 3 social gaming company on Facebook with about 42 million active players every month. Mr. John Pleasants, the chief executive officer of Playdom, would join Disney as an executive vice president and report to Mr. Steve Wadsworth, the president of the Disney’s Interactive Media Group. Click here (http://www.investorconcepts.com/user/register) to sign up for your free Investor Concepts membership Disney agreed to purchase Playdom for $763.2 Million

The Walt Disney Company became one of the leading playing in the booming social gaming space by purchasing Playdom, a Mountain View, CA-based social gaming business for $763.2 Million. Playdom’s revenue in the year 2009 accounted to around $50 Million. In addition, Playdom is the No. 3 social gaming company on Facebook with about 42 million active players every month. Mr. John Pleasants, the chief executive officer of Playdom, would join Disney as an executive vice president and report to Mr. Steve Wadsworth, the president of the Disney’s Interactive Media Group.

Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/disney-agreed-purchase-playdom-763-2-million-48550/ Thai Union agreed to buy MW Brands for $884 http://www.szone.us/f65/thai-union-agreed-buy-mw-brands-884-a-48545/ Sun, 22 Aug 2010 02:07:21 GMT *Thai Union agreed to buy MW Brands for $884* Thai Union Frozen Products, a seafood exporter, agreed to buy MW Brands, a tuna canner, from Trilantic Capital Partners for $884 Million. MWB controls brands like John West, Petit Navire, Hyacinthe Parmentier and Mareblu. “The deal would give his Thailand-based company better access to supplies and end markets, double the fleet size, improve its position in tuna canning and create cost-saving synergies”, said Mr. Thiraphong Chansiri, the president of Thai Union. NOT YET A MEMBER OF INVESTOR CONCEPTS Click here (http://www.investorconcepts.com/user/register) to sign up for your free Investor Concepts membership Thai Union agreed to buy MW Brands for $884

Thai Union Frozen Products, a seafood exporter, agreed to buy MW Brands, a tuna canner, from Trilantic Capital Partners for $884 Million. MWB controls brands like John West, Petit Navire, Hyacinthe Parmentier and Mareblu. “The deal would give his Thailand-based company better access to supplies and end markets, double the fleet size, improve its position in tuna canning and create cost-saving synergies”, said Mr. Thiraphong Chansiri, the president of Thai Union.

NOT YET A MEMBER OF INVESTOR CONCEPTS
Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/thai-union-agreed-buy-mw-brands-884-a-48545/ <![CDATA[Stanley Black & Decker agreed to acquire CRC-Evans for $445 Million]]> http://www.szone.us/f65/stanley-black-decker-agreed-acquire-crc-evans-445-million-48544/ Sun, 22 Aug 2010 02:04:07 GMT Stanley Black & Decker agreed to acquire CRC-Evans for $445 Million

Stanley Black & Decker, a giant provider of hand and power tools, agreed to acquire the Houston, Texas-based CRC-Evans, a supplier of tools, equipment, and services for constructing oil and natural gas pipelines, for $445 Million in cash from NGP Energy Capital Management. “This is a financially and strategically compelling transaction for Stanley Black & Decker,” said the company’s chief executive, Mr. John F. Lundgren. The acquisition of CRC-Evans would immediately add to Stanley Black & Decker’s earnings, producing more than 10 cents a share in additional income within three years.

NOT YET A MEMBER OF INVESTOR CONCEPTS
Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/stanley-black-decker-agreed-acquire-crc-evans-445-million-48544/ Consumer Confidence Drops Again in July http://www.szone.us/f65/consumer-confidence-drops-again-july-48543/ Sun, 22 Aug 2010 02:01:16 GMT *Consumer Confidence Drops Again in July * Consumers Confidence in the US dropped for a second consecutive month from 54.3 in June to 50.4 points in July with concerns on unemployment situation and income prospects. Those seeing jobs as hard to get rose to 45.8 percent in July from 43.5 percent in June. On the issue of income expectations, 17.5 percent see income down in six months, compared to 16.8 percent in June. Only 10 percent expect higher income in six months, compared to 10.6 percent in June. “Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that are not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season,” said... Consumer Confidence Drops Again in July

Consumers Confidence in the US dropped for a second consecutive month from 54.3 in June to 50.4 points in July with concerns on unemployment situation and income prospects.

Those seeing jobs as hard to get rose to 45.8 percent in July from 43.5 percent in June. On the issue of income expectations, 17.5 percent see income down in six months, compared to 16.8 percent in June. Only 10 percent expect higher income in six months, compared to 10.6 percent in June.

“Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that are not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season,” said Ms. Lynn Franco, the director of the Conference Board Consumer Research Center.

Consumer Confidence is an important metric observed by financial market participants because it is the driving force for Consumer Spending, which drives the two-thirds of the nation’s economic activity.

“The Consumer Confidence Index” is based on a monthly survey of a sample of 5,000 U.S. households asking them on how they feel about the economy. This index had a base value of 100 in the year 1985. An index level above 90 indicates a stable economy, and a level above 100 is an indication of stronger growth, but the recent estimate in February of 46.0 points has been the lowest since April 2009.

NOT YET A MEMBER OF INVESTOR CONCEPTS
Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/consumer-confidence-drops-again-july-48543/ Disney agreed to sell Miramax Films for $660 Million http://www.szone.us/f65/disney-agreed-sell-miramax-films-660-million-48542/ Sun, 22 Aug 2010 01:58:14 GMT Disney agreed to sell Miramax Films for $660 Million

The Walt Disney Company agreed to sell Miramax Films to a group of investors for $660Million. The sale of Miramax Films includes rights in over 700 film titles, including the Academy Award winners like “Chicago”, “Shakespeare in Love”, and “No Country for Old Men”. In addition, it includes other non-film assets, such as certain books, development projects and the name "Miramax". “Although we are very proud of Miramax’s many accomplishments, our current strategy for Walt Disney Studios is to focus on the development of great motion pictures under the Disney, Pixar and Marvel brands,” said Mr. Robert A. Iger, the chief executive officer of Disney. The deal is subject to certain regulatory approvals and is expected to close in the fourth quarter of 2010.

NOT YET A MEMBER OF INVESTOR CONCEPTS
Click here to sign up for your free Investor Concepts membership ]]> Business Steve Boren http://www.szone.us/f65/disney-agreed-sell-miramax-films-660-million-48542/ How We Get Through This Mess http://www.szone.us/f65/how-we-get-through-mess-48539/ Sun, 22 Aug 2010 01:35:39 GMT The group was a Vistage group in which my daughter Tiffani participates. This is an organization of 12 businesspeople (in this case all CEOs of small businesses) who meet once a month to share and learn about better business practices, accountability, planning, and all the aspects of running a business. Every person I have ever met who has been involved in Vistage has had good things to say about it. I have watched it help Tiffani a lot. She truly runs our business now,...]]> 08.20.10 07:59 PM

How We Get Through
"Where Is My V-Shaped Recovery?"
We Have Met the Enemy, and He Is Us
So Where's the Good News?
LA and Europe

< encouraging. more little a be to said have should I what will letter week?s this so said, could is there reflection upon But tried. And laugh. humor gallows of kind with them, for news good any didn?t whether me asked one presentation my after and environment, economic current the about entrepreneurs businessmen group small spoke week> The group was a Vistage group in which my daughter Tiffani participates. This is an organization of 12 businesspeople (in this case all CEOs of small businesses) who meet once a month to share and learn about better business practices, accountability, planning, and all the aspects of running a business. Every person I have ever met who has been involved in Vistage has had good things to say about it. I have watched it help Tiffani a lot. She truly runs our business now, allowing me to read and write and travel and speak. I am a very lucky man and proud Dad.

I have particularly watched my partners at Altegris really truly transform their business model through their involvement with Vistage. First the CEO, Jon Sundt, joined, and now the partners have all joined Vistage groups focusing on their roles in the business. Sundt was always a good businessman, but the level of professionalism of his whole company has gone up a notch. It is a pleasure to watch them grow, and they give Vistage a large measure of the credit for their success. In fact, when I went to the Vistage web site to get the link, I saw a brief video of Sundt talking about his experience. (http://www.vistage.com/) I am proud to be their partner.

If you have a business and could use some help and professional mentoring, you should look into finding a Vistage group that works for you. They match businesspeople in different industries but with roughly same size businesses. In tough times you need all the help you can get.

I talked to them about the current economic environment and what I saw coming down the road. Long-time readers know that I think we are in for an extended period of slow growth, high and sticky unemployment, and volatile markets punctuated by more frequent recessions. That is what you get when you have a deleveraging environment resulting from a credit crisis. It is what happens when the Debt Supercycle ends. We start the journey to the New Normal and it just takes time.

"Where Is My V-Shaped Recovery?"

Remember all the bulls and cheerleaders late last year and into this one talking about a V-shaped recovery? They were making their projections based on what had happened in past recessions. I (and others) argued that that data was meaningless, as it did not reflect the fact that a balance-sheet recession requires years of deleveraging, is inherently deflationary, and all the factors that produce the normal "V" are no longer in play. Bank lending is still dropping. Savings rates go up. Debt gets paid down. Governments run into limits as to how much they can stimulate the economy without creating large and destabilizing debt. Central banks push rates to zero, and then what? This is a far different environment than we have had for the last 70 years. Using past performance to predict future results when the future environment is significantly different than the period in which the data was collected is misleading at best and worthless at worst, leading to bad decisions. Much better to deal with reality.

And just to show that I am really the optimist in the room, let's turn to my good friend David Rosenberg, writing this morning under the following headline:

"U.S. RECESSION NEVER ENDED; GDP TO CONTRACT IN Q3

"Our suspicions have been confirmed - the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the 'build in' for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak-to-trough contraction in the 2001 recession was 1.3%! That is incredible.

"Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting."

Politicians are going to be greeted with a GDP number for the third quarter, right before the elections. Will it be negative like Rosie thinks? I am not sure, but in any event it will not be good. Structural unemployment will still be over 10% and deficits will be high.

Look at the following graph from my friends at The Liscio Report. Unemployment and continuing claims have started to rise again. This is not what happens in V-shaped recoveries, gentle reader. The ONLY reason the headline unemployment number has dropped a little is that the Labor Department has dropped so many people from the labor force. Again, if you have not looked for a job for four weeks, they do not count you as unemployed. If you use the labor-force number from just last April, unemployment is 10.5%. Brutal. Who doesn't know too many people without jobs?

But it is not just rising unemployment claims. Yesterday's Phillie Fed report was just awful. Buried in the details was the fact that the hours-worked index is collapsing, consistent with previews to past recessions. Very worrisome. (From my favorite slicer and dicer of data, Greg Weldon: www.weldononline.com)

Bottom line? It is going to be a tough environment for the next 6-8 years. That is just what happens when you have a deleveraging / balance sheet / deflationary / end of the Debt Supercycle recession. It is what it is, and no amount of wishing or finger pointing can change the facts.

Let me take a moment and offer some sympathy to President Obama. This recession/slow period is not his fault. Obamacare? A now-trillion-dollar stimulus? Those he owns. But the recession/credit crisis would have happened if McCain had been elected.

And it is not Bush's fault. Did he make some mistakes? Oh yes. Squandering those surpluses is huge in my book. Not vetoing all that excess spending is at his feet. And there are other issues, but that is not my point.

We Have Met the Enemy, and He Is Us

There is a great line from the old cartoon strip Pogo: "We have met the enemy, and he is us." (Ah, I miss Walt Kelly and Pogo. But I show my age!)

Neither Clinton nor Bush forced people to borrow money against their homes. Yes, some of the laws made it easier. Yes, Greenspan pushed rates lower than they should have been. Allowing banks to go to 30:1 leverage was stupid (courtesy of the Bush administration). Repealing Glass-Steagall in hindsight was not wise (Clinton era).

But we the people borrowed and spent. Congress taxed and spent and we voted for the SOBs and collectively asked for more goodies. Maybe not you, gentle reader, because all my readers too smart to have engaged in such reckless activity, but those other guys sure did. Probably the readers of Paul Krugman. (Did I say that?!?)

So, the current problems are not Obama's fault. But how he deals with them is. Raising taxes in what can only be called a soft environment gives him ownership of the consequences. And it is more than just the Bush tax cuts going away. Obamacare gives us a host of new taxes. (If you want to see more, read http://www.atr.org/six-months-untilb...ax-hikes-a5171)

So Where's the Good News?

Ok, I could go on for hours, sorting through the problems. Where is the good news I promised?

Here's what I should have said to Tiffani's group: Let's face it. Running a small business is never easy. I am a serial entrepreneur. I have started and run a lot of very different businesses. Some have been very, very good and some went down in spectacular flames. I can remember some near-death experiences when the economy was booming. I have watched a million-dollar income stream dwindle to zero and there was not a damn thing I could do about it, except enjoy the money while it was there and use it to buy the next income stream. I have had to rebuild several times from scratch as markets shifted drastically underneath my feet. And I've changed directions as new opportunities revealed themselves.

In all this I'm like every other small-business entrepreneur out there. It is never easy. But that is what we do. We get up in the morning and figure it out. Some 80% of startups die within ten years. But we pick ourselves up and start over.

I know unemployment is 10%. But that means almost 90% are employed. Consumers are saving more. So adjust. Figure out what your New Normal looks like.

The '70s were a bitch. I woke up many times in the middle of the night with real pains in my stomach wondering whether to pay the rent or make payroll. So did a lot of people. But look at all the new companies that came out of that era and changed everything: Microsoft, Apple, Intel, etc. Cell phones. The internet. The list is long.

Yes, we have to make our way in this Muddle Through World. It will be challenging, but I can almost guarantee you that when we do get through there will be other challenges. If it was easy everybody could do it and there would be no money in it. Embrace the challenge!

I asked one of my really close (36 years) friends and business associates last year how his business was doing. "We are doing great!" he said. That was not the answer I was expecting. "Why? How?" I asked.

"Well, most of our competitors have folded. We survived and got the business."

Ultimately, that is how we get out of this. A hundred million families and millions of businesses figuring it out, learning how to adapt to the New Normal. Sadly, some of them won't make it. But most of us will!

As I said, I am a serial entrepreneur. I have a friend who designs and oversees large teams of programmers of really robust analytic software, very cutting-edge stuff. She is a winner, and I am backing her (I know nothing about software but the rule is, invest in people!). We'll see how it goes, but my bet is that in a few years there will be a lot of people getting jobs because we take on some risk now.

We are adapting our own business here. We will soon have new websites. I will be doing (at first) an audio podcast called the Mauldin Minute and then (hopefully) by the end of the year morphing into video. That's the wave of the future and I need to keep up.

I am addicted to information and reading . We are going to try and make some money from my addiction. What would you pay to look over my shoulder and read the 5-10 most important things I find in a week? I will become your personal reader. Will that be a life-style changer? No, but it will provide some income diversification.

When Tiffani made her presentation to her Vistage group about our business, she had a lot of charts and graphs. I was surprised how our sources of income have varied over time. Some previously large (at least on my scale) sources literally dried up within a few years, completely askew from our original optimistic expectations. It was very apparent that we cannot sit and assume things will be the same year to year. So we adapt.

I have been presented with a very different opportunity in a non-finance field that is right in my wheelhouse, as they say. Tiffani and Ryan and I are going to pursue it. Will it thrive? Be a real business in five years? We will see, but I have the ability to take that risk and I am going to do so.

And so will hundreds of thousands of other visionaries and dreamers. That is how we get through this. We work through the ugly and then we get to the 2020s, and I think we will once again be talking about the Roaring 20s! Whole new industries will come into existence. Pay attention to the advancements in robotics. Biotech will be HUGE this decade, but we need to change the rules so we don't lose the intellectual property and the jobs. Electric cars will boom as we replace our fleet all over the world. Nanotech later in the '20s. Green energy and nuclear. Artificial intelligence (finally!). Really cheap (I mean really cheap!) wireless high-speed broadband all over the world will open the door to all kinds of possibilities. I met last night with very credible scientists who have developed a way to filter water very cheaply. A desalinization module that fits in a cargo container. Yes, they need a lot of money to finish, but they will figure it out. And on and on. The opportunities are going to be huge. Trillions will be made.

So, we get through this. We Muddle Through. We figure it out, one business and family at a time. And as a culture, a world, we get to a better place. My bet is that in 2020 no one is going to want to go back to the good old days of 2010. We will be excited about the future and all the cool stuff that is happening.

Recessions and tough times are God's way of telling you that you need to adjust a few things, both on a personal and business level – also nationally and globally. I am an optimist. I believe we will adjust and grow, not just in the US but as an emerging world. There are just so many opportunities.

So, don't let the problems I write about in this letter make you crawl into a cave. Just be realistic and figure out where your opportunities are. And then go make them happen! You are responsible for creating your own future. And I hope it is a good one. I plan on making mine one.

LA and Europe

I am in San Francisco at the MoneyShow. There is a good crowd and I have dropped in on a few presentations. There seems to be some talk about a bond bubble, whatever that is. I just see Boomers realizing they need to be more conservative, and a deflationary environment.

The bubble is in sovereign debt. That is not going to end easily. For many countries it will end in tears.

It looks like I am going to have to shoot to LA week after next for some meetings and a check-in with the design/imaging/branding group that is developing our new web presence strategies. Within a few months you will be able to comment on my writing, communicate with fellow readers (civilly, of course!), and ask questions which Ryan will try to corral me into answering. Lots of new and cool things coming.

Oh yes, the book. Sigh. A personal situation has delayed me a week, but I swear I'll get the final chapter written next week and then out to some friends for comments and off to the publisher.

My schedule for Europe is shaping up. I will be in Amsterdam September 11-14, then Malta, Zurich, Mallorca for some fun with my London partner Niels Jensen and team for the weekend, then to Copenhagen for a day (at least one session will be open to the public), and then on to London and back home. Drop me a note if you want to meet, and I will get it to the keeper of the schedule.

And thanks to Charles Githler for being such a great host at the MoneyShow! Amazing, this is their 32nd year of doing the show here. Where does the time go? He was a 21-year-old kid when he started this, and he has created a really significant business, with conferences all over the world. And he started in 1978 and lived through two recessions. It can be done!

It is time to hit the send button. I have yet another presentation in 37 minutes and need a few minutes to prepare. Have a great week and enjoy the moment! I am, although sitting in a hotel room in San Francisco is not my preferred environment. I do love this city. But that, gentle reader, is the small price of the privilege of writing to you each week.

Your ready to get out of this room analyst,

John Mauldin

http://feedproxy.google.com/~r/Thoug...this-mess.aspx ]]> Business Steve Boren http://www.szone.us/f65/how-we-get-through-mess-48539/