Business Ruminations

What does S&P's downgrade of US credit mean?

2011-08-06T15:40:00.005-04:00

It was sobering to wake up to the news that Standard & Poor's downgraded the credit of the USA from AAA to AA+, but it’s unclear whether S&P’s downgrade now makes more sense than Moody’s and other credit rating agencies' decision to delay theirs. Our current and pending finances more than justify the action as our nation’s finances continue to accelerate beyond the realm of reason. To the extent that S&P’s downgrade serves as a wake-up to our political leaders to get their fiscal act together before even more dire consequences occur, then the downgrade is probably good for America over the long term.

However, it’s unfathomable that the most powerful military and economic power the world has ever known now has a lower credit rating than more than a dozen other nations. How is that possible and what does the downgrade really mean? America is still the only nation in the world that can ultimately back up its promise to pay its bills (and defend other nations rights to do the same) with its superior economic and military might, which is why the US dollar, as battered as it’s been in recent years, is still the world’s reserve currency. How can Germany and France, for example, and other smaller members of a European Union (EU) that is crumbling before our very eyes still have AAA ratings? The imminent (hopefully) bailout of the EU will likely and ironically include assistance from America, just as our TARP program bailed out European banks along with our own.

What happens to all those AAA sovereign credit ratings if our newfound fiscal awareness leads to a scale back of our multi-trillion dollar program to keep the world safe from terrorists and open for international trade? What does it mean that Canada, our northern neighbor, is now the only AAA rated nation in the Western Hemisphere? Can AAA rated Switzerland truly remain a safe-haven without backup from American security? For that matter, what happens to the world’s well being if US financial aid and physical assistance shrinks to meet its new budget? Are other AAA rated nations going to risk jeopardizing their coveted superior ratings by offering to pick up the slack?

Aside from the disappointment and embarrassment of losing the superior credit rating enjoyed since such ratings began, S&P’s credit downgrade is probably justified and necessary. However, S&P will be remiss unless it updates other sovereign ratings in the new light of America’s loss.

Economic Recovery Hinges on Business Finagling

2011-02-08T14:32:00.001-05:00

Top-down empirical evidence from corporate America as of Q4 2010 is showing a robust increase in business sales and earnings, nearing in some cases pre-financial debacle highs. Bottom-up and admittedly anecdotal evidence of how companies are meeting those sales targets is less encouraging.

Unable to offer the dizzying and ultimately disastrous array of credit formerly available just a few short years ago, some companies have resorted to low tech and even pedestrian gimmicks in order to boost sales. Some methods benefit consumers and sellers alike, such as the buy-one-get-one-free policy (BOGO), enabling sellers to dump costly inventories while enabling consumers to stock up on items for future consumption. The BOGO policy is supplanting cheap and abundant credit as a popular method for encouraging consumers to consume today by borrowing from future purchases. What will drive future sales?

Less compelling are the “now you see it now you don’t” discounts that appear certain hours throughout a day, or on the internet but not on the phone, or in print but leave out important caveats that detract from discount offers. Some discounts don’t offer brand confirmation on receipts making consumers wonder if they’re getting what they pay for. Competition is fierce as businesses will do anything get consumers attention.

Unsavory and deceptive approaches to gin up sales further indicate an anxiety and desperation among sellers not seen in recent history. For example, have you noticed lately some of your monthly bills contain superfluous jargon that confuses you? It would seem that some companies hope you pay their bills without reading them, and it’s a fact that others will reward you for joining their automatic payment plans, so you never have to read their bills again. If you’re diligent and actually read your bills you may notice unaccounted charges, and learn that the agreement’s fine print automatically initiates the purchase of an additional service, unless and until you explicitly call them and tell them you don’t want it. Sometimes that service will automatically renew unless it is explicitly terminated. Even when those unexpected charges turn out to be an error, customer service representatives will attempt to sell you something new, even before THEIR error is corrected. Heads they win, tails you lose! Aggressive sell tactics have existed forever, but were once only used by small or fly-by-night purveyors. Now even image conscious corporate giants and household stalwarts heretofore synonymous with good customer service use those tactics. They have become so common that comparing experiences has become a mainstream pastime among many consumers.

It is clear that an economy 70% based on private consumption must expand that sector before meaningful economic recovery can occur. With unemployment chronically high, public and private pension plans under duress for decades to come, new household formation temporarily stalled and the housing sector in the doldrums in the near term, consumer incomes and spending are unlikely to expand much for quite awhile. Corporate America would be well advised to concentrate on offering consumers products and services they desire and need, instead of relying on deception and gimmicks to meet their sales goals.

It’s the Economy, not Politics, Stupid!

2010-12-13T13:09:00.002-05:00

Many democrats and republicans are wrestling with President Obama’s proposal to extend the Bush tax cuts and other items, each believing their party’s approaches to be superior for solving our immediate and long term economic problems. Even the President enlisted the support of former President Clinton to sell his proposal in an attempt to capitalize on his administration’s prosperity during the mid-to-late 1990s. Republicans point to the Reagan 1980s and to supply-side economics employed at that time as holding the key to our economic prosperity going forward. Of course, republicans claim Clinton’s success should be at least partially attributed to republican influence in congress at that time, just as congressional democrats claim to have reined in Reagan. The fact is that notwithstanding political differences, key economic metrics from those periods are remarkably similar. Each period grew jobs at approximately 2 percent per year; Clinton added more jobs, but GDP grew slightly faster under Reagan.

Each party discounts the role of non-political factors to Clinton’s and Reagan’s success. However, both administrations coincided with a dramatic decline in long term interest rates and stable low inflation. Neither administration had to manage an active war, although Reagan presided over and spent us through the successful completion of the Cold War. Reagan benefited from following the economically turbulent and eventually stagnant 1970s and Clinton benefited from the global technology boom including the proliferation of the internet, probably the most transformational change since the invention of the printing press.

Going forward, many professional economists place limited confidence in democrat-favored government spending as an economic stimulus, and typically point to its failure during the Great Depression and, more recently, during the first two years of the Obama administration. The recently fortified republican congress is aggressively seeking a more supply-side approach, emphasizing tax cuts for small businesses and individuals. The republican view is that putting money in the hands of the private economy will succeed in stimulating the economy where massive public spending could not.

Notwithstanding all the uncertainty about economic policies and the confusion added by all the politics, it should be clear that growing our economy is one of the necessary ingredients to solving our hopefully short-to-medium term economic doldrums and our long term deficit. If the past thirty years of prosperity has shown us anything it’s that policies that stimulate economic growth and employment are ultimately good for stimulating tax revenues.

Dow Reaches 11,000-- What's Next?

2010-04-10T12:17:00.000-04:00

The range of opinion on the future path of the stock market is as wide as ever. Optimistic investment pundits pointing to daily improvements in some economic metrics see opportunity for gains in the short-to-medium term, but hasten to caution that those gains may be short lived as significant market headwinds arriving as early as this fall could derail the market's climb for many years to come. Some are hopeful that those headwinds will mitigate if republicans regain control of congress next November and temper the Obama administration’s anti-growth tax-and-spend economic agenda.

Pessimists acknowledge those daily improvements but believe that the market’s dramatic recovery since March 2009 is primarily the result of temporary government and Federal Reserve intervention that has stabilized the economy and the markets. They believe that the private economy is not yet self-sustaining and cite the persistence of many of the circumstances that caused the great crash last year as gnawing reminders that it is premature to claim victory over our economic woes. Furthermore, they believe the dramatic expansion of debt and deficits among the world’s major governments is a substantial threat to full global economic recovery and long term prosperity. Pessimists concede that congressional gridlock next year could stop the rampant government spending, but hasten to point out that gridlock won’t reduce the already robust government debt and deficit that inevitably higher interest rates will further exacerbate.

The optimists know that bull stock markets begin with seemingly unimportant short term economic improvements, but the pessimists know that market moves also anticipate the long term health of the economy. And, everyone knows that the US economy relies heavily on a US consumer that continues to weaken under the pressure of chronic high unemployment, growing credit restrictions, negative home equity, and bleak prospects for higher taxes, not to mention the negative outlook for both public (social security/Medicare) and private pension systems. Imagine what a spike in oil prices would do to consumer spending, as the situation between Israel and Iran approaches a climax later this year.

Given our economic predicament, it is rather amazing that the market has recovered so far so fast, especially because optimists and pessimists agree that our critical economic challenges are likely to reemerge as issues later this year and fester for many years. If the hard times do start as early as this fall, there is a real risk that a correction could begin as early as next month. Everyone knows that the market typically retreats during summer months, and if investors anticipate bad times ahead, it is more than a possibility that the slightest provocation could cause a major decline sooner rather than later. After all, who wants to be on vacation when the market corrects?

Moreover, one must wonder how the currently cheerleading financial media factors into the market's good fortune lately. The media continues to encourage short term investment even in the face of an imminent, potentially violent market turnabout. When will the media trot out all the so-called doom-and-gloomers? After the correction begins, as they did last time? It would be instructive to balance all the bullish reports with the views of some well informed market bears, BEFORE the downturn actually begins. No one wants to hear their market autopsies AFTER the market starts sliding. The bears have been caged for so long, let's hope the mere media appearances of them do not themselves trigger a market correction.

When will South Florida Real Estate Recover?

2010-03-19T15:05:00.004-04:00

My trusted local realtor, Cathy, presented me with the current conventional wisdom on the question, and answers ranged from extremely optimistic “presently” to extremely pessimistic “the year 2030”. Her answer raised in my mind a few other related questions, most notably, whether the market had yet “bottomed” and what “recovery” actually means. I also wondered about all the factors that would cause each process to occur.

The optimists say the market has already bottomed, and base that conclusion on scant recent data showing a recent up tick in sales activity and prices. Pessimists, however, are less sanguine and think it difficult if not impossible to call a market bottom so long as all the government tinkering with the markets through stimulus programs, such as buyer tax credits, residential loan buying programs, and bank bailouts, continues to gum up the free market clearing process. They think that banks sitting on foreclosed assets are also artificially propping up the market and keeping markets from achieving their true prices. Unless and until those temporary subsidies abate, and all the sellers actually finish selling, calling a market bottom and plotting a recovery trajectory will be premature at best. Eventually, however, even the pessimists believe a bottom will be reached.

Recovery means everything from a modest bounce off the bottom to a return to the all time price highs achieved in 2006. Short term recovery will depend on unemployment rates, currently at an all time high of 12+ percent, wealth levels that ebb and flow with a volatile stock market, and the availability and cost of mortgage financing. With all the talk of a possible double-dip recession, the stock market potentially re-testing March 2009 lows, mortgage interest rates reflecting more stringent underwriting criteria, and Fed interest rate hikes inevitable within the next year, the prospects for recovery seem to be fragile at best.

Longer term recovery will hinge on those factors and some others. Florida population growth has slowed significantly during the past several decades and will continue to slow. In addition, the Obama administration is determined to implement a big government agenda that is pushing public debt and deficits to astronomical levels, and could push interest rates, the US dollar, income taxes and inflation to their most unfavorable levels in ages. None of that will be good for the economy or real estate market recovery, with the possible exception that a weak US dollar may encourage more foreign investment in South Florida real estate.

What is the likely recovery scenario? South Florida’s sky high real estate prices in recent years were part of a national real estate bubble that was borne out of the extraordinary availability of cheap mortgage financing and irresponsibly lax mortgage underwriting standards. Some think those conditions and the extraordinary price level they created are gone forever, but most think they are unlikely to re-emerge for at least a generation. Price recovery to a level three to four times South Florida median income levels would be affordable and sustainable and is probably the most likely price recovery scenario. According to the South Florida residential real estate price index, current median home prices are in an affordable range now and may suggest that indeed a market bottom is imminent. Unfortunately, however, that index may also suggest that further price increases based on local economic dynamics will be slow and modest going forward. (The index shows that South Florida home prices in 2006 reached 170 percent of their year 2000 level, and that even after the dramatic decline in recent years prices are still nearly 50 percent higher than in the year 2000.) What would it take to reach that 2006 high price level? Answer: home price increases would need to average 3 percent yearly for the next two decades in order to reach by 2030 their all time 2006 high.

Healthcare Reform: Some is Better than None

2010-03-10T12:28:00.002-05:00

The president and democrats have claimed repeatedly that some healthcare reform is better than none, yet they are on track to virtually guarantee that nothing will change in our healthcare system for the next few years. If Obamacare fails, the president and democrats will have no one to blame but themselves. After many debates and presentations designed to garner support, recent polls clearly show that the vast majority of Americans believe Obamacare will substantially add to our national deficit and debt, severely hamper economic growth, and most importantly, it will not improve the affordability or quality of healthcare for the average American.

The president and democrats appear to have backed themselves into a corner with few good options for advancing their vision for a new healthcare system. They can quit now days short of a congressional vote, a la President Clinton in the 1990s, and risk a repeat of democrats losing big in this year’s elections as they did in 1994. More likely, the president and democrat party leaders will pressure congressional democrats to support Obamacare by using draconian and desperate carrot and stick measures. If Obamacare fails, history tells us that democrats will still lose big next fall. If Obamacare passes, democrats may redeem themselves by November’s election, assuming they can dramatically change the voting public's emphatically negative opinion of the plan and the unsavory process that made it law. That would be a long shot at best. Either way, if democrats lose big in 2010's election, republicans will do everything possible to disrupt implementation of Obamacare, even if it becomes law. If republicans establish a majority in congress you can bet they will do their best to repeal it altogether. Either way, Obamacare is unlikely to become a sustainable viable plan for our healthcare system.

Wouldn’t it be better for the president, the democrats, and the nation, for the president to make a deal with republicans, and capitalize on the 80 percent agreement the president claims both parties have for his plan? Wouldn’t it be better for the president to pass that 80 percent, or whatever percentage a bipartisan group can agree upon, and get a resounding bipartisan endorsement for healthcare reform? The president and democrats could claim victory for long awaited healthcare reform, and have bipartisan support that would ensure its future political viability. It may also restore some of the public's faith in government and potentially create enough good will to encourage bipartisan cooperation for tackling other major problems, such as our faltering economy, and burgeoning debt and deficit. That approach would also give the president an opportunity to call the republicans bluff. If republicans don’t cooperate with such a truly bipartisan approach, then they will prove to be the party of “no.” Also, the president claims that republican congressional majorities have always and will continue to do nothing to reform healthcare, so shouldn’t he use his majorities to get something worthwhile done now?

The president has made it easy for his republican critics by giving them nothing to lose by opposing Obamacare. For example, the president’s refusal to make tort reform part of his plan is the most egregious example of partisan democrat politics and makes Americans less sympathetic to democrat claims of republican political obstructionism. Furthermore, in an otherwise often abstruse debate about healthcare reform, tort reform makes intuitive sense as a way to trim the cost of a hopelessly cost bloated healthcare system.

The president’s all or nothing strategy is likely to yield nothing of enduring value to improve our healthcare system. Replacing comprehensive reform that has limited support with some incremental bipartisan changes would allow the president to succeed at real healthcare reform without potentially decimating our economy or the democrat party.

Florida's Mass Transit Problem is not Mickey Mouse

2010-02-20T11:52:00.003-05:00

As a resident of South Florida witness to some of the worst driving in the nation, I am always interested in discussions about bringing public mass transit to Florida, but the proposed Tampa-Orlando high-speed rail seems to be extravagant and irrelevant to some of the real public transportation issues facing Florida at the moment. The Tampa-Orlando high-speed rail link is estimated to cost $3.5 billion and upon completion will likely operate with ongoing subsidies. You can bet the Orlando-Miami link will cost a multiple of that amount and that both links will end up costing a lot more and take a lot longer to build than anyone is projecting today. It always does.

The real question is why are those rail links needed? Are they needed to take national and international visitors coming through Tampa and Miami back and forth to see Mickey? The State of Florida should be addressing the growing mass transit needs of South Florida, a major economic focal point of the State, and should be addressing the already critical needs of a growing, aging senior population.

Mass transit requires high density living and employment patterns to work effectively and economically. The good news is that South Florida, defined as the conurbation of Miami-Dade, Broward and Palm Beach Counties, is about as dense as you will find in Florida. Thirty-percent of Florida’s population, or more than 5.5 million persons, live in those three counties, which amount to about ten percent of Florida’s land area, and equates to a density of more than 1,000 persons per square mile.

South Florida’s senior population (65+ years old) is nearly one million today, and if national forecasts hold true here, it may grow 40% within the next five years. Additionally, today’s 65-year-old has a life expectancy of 84 years. During winter months, more than a million seasonal visitors and tourists add to the region’s senior population. An urgent need clearly exists to provide residents and visitors with a real alternative to driving to meet their daily local travel requirements.

The bad news is that it is unclear whether South Florida’s senior population density of less than 200 persons per square mile can support a viable mass transit system, especially in relatively low dense Palm Beach County where seniors are particularly concentrated and most likely to favor for retirement in the future.

The State of Florida should fast track a plan to solve this serious transportation problem and should consider all options in developing solutions. In addition, emerging transportation and land development plans must be consistent so that future development densities support whatever mass transit solution is ultimately adopted. Solving this important problem will be essential to maintaining the favored status of South Florida as a retirement venue and as one of Florida’s most vibrant economies.

US Government Spending Must Fade to Black

2010-02-16T12:39:00.002-05:00

Four key numbers—government spending, federal tax revenue, the budget deficit, and national debt- provide important and sobering insight into our current fiscal health. 2010’s raw numbers are dramatic and mind boggling to the point of distraction, but relating them to our $14.3 trillion Gross Domestic Product (GDP) make them relevant, easier to comprehend, and relatable to one another. Those ratios are as follows: government spending/GDP is 28%; federal tax revenue/GDP is 16%; the budget deficit/GDP is 12%; and the national debt/GDP is 85%. Those ratios are horrendous, especially considering, for example, that the European Union requires members to have national debt and budget deficit ratios less than 40% and 3%, respectively, when they join the union, considerably lower than ours at the moment.

The current budget deficit is 12% of GDP (28%-16%); and will add to our national debt. That deficit means that our economy is currently borrowing 45 cents of every dollar it spends, and at that level it should push our national debt to 109% of GDP within a couple of years (85% + [12% x 2]). That would put us in the esteemed company of Greece and well on our way to the disastrous path of Japan.

Arithmetically, there are two major solutions: decrease spending, increase taxes, or do some of each. Politically, the solution is not so easy. The liberals (usually democrats) want to increase taxes, believing that corporations and the wealthy should pay more to meet our needs. The conservatives (usually republicans) want to decrease spending, pointing to government waste and inefficiency and a spending level similar to some of the European socialist governments. They also say that the top 10% of taxpayers already pay more than 70% of all federal taxes, so it is unlikely that further tax increases targeting only the wealthy will yield enough tax revenue to mitigate our fiscal problem.

Obviously, fiscal policymakers would like to tinker with all four numerators of those ratios, but they should also consider policies that might increase the denominator, GDP, which would also help solve the problem. History and the facts seem to favor the conservative strategy of cutting government spending and cutting taxes as effective catalysts for economic growth. Apparently, across-the-board tax cuts worked well for both democrat and republican administrations, under Calvin Coolidge in the 1920s, John Kennedy in the 1960s, Ronald Reagan in the 1980s, and Bill Clinton in the 1990s.

Reducing our future budget deficits will limit our compounding national debt, and should be our immediate objective. However, reducing our national debt should be a very close second objective. When our debt’s interest rates, currently artificially low at 3%, double, triple or worse, the attendant increase in debt payments could cripple our financial system and economy. Rising interest rates will be an inevitable part of the global recovery and it may happen sooner than later. An expanding global demand for capital, global inflation, and a potential reduction in the US credit rating, are among the major factors that could easily cause a dramatic increase in those interest rates and our interest payments. And, as those debt interest payments become a greater proportion of the spending budget they will either crowd out important investment and consumption spending or increase the budget, thereby further expanding our national debt and our fiscal problems. It will come at the expense of our economic growth, productivity and standard of living.

Some expect the government to continue printing money as it and many other governments have done during similar crises in history. This time may be different, however, as the major holders of our debt, especially China, may have something to say about the US deliberately devaluing its debts and their investments. Although inflating out of the problem effectively grows the denominator, GDP, it does so artificially in inflated (not real) terms, and ravages US financial and fixed income assets, such as bank deposits, savings bonds, social security and pension funds. It may also ruin the US dollar. Is that better than a smaller government and reducing government spending?

South Florida Economy and Real Estate Market Are in the Eye of a Perfect Storm

2010-02-02T13:38:00.001-05:00

Despite uncertainties surrounding the national economy, three major components of the South Florida economy-- tourism, healthcare and financial services—add additional complexity to future economic and real estate forecasts. Any declaration by local pundits of a bottoming in the economy or real estate prices in the near term should be met with skepticism and considered somewhat wishful thinking. South Florida's economic and real estate vitality relies heavily on its ability to import dollars from outside Florida, by attracting out-of-state and international visitors, and by encouraging visitation by longer stay retirees and snow birds for several usually winter months every year. Assumptions about those spending patterns appear as uncertain as any currently facing the national business scene at the moment.

First, Florida tourism has been held hostage by a barrage of tropical storms and hurricanes that have left nowhere to hide for several months every year beginning in 2004. Panic reached a crescendo after an unprecedented 27 named storms appeared during the 2005 Atlantic hurricane season. Some believe storm activity has also interrupted Florida's multi-generational permanent population growth by contributing to out-migration in recent years. And, although storm activity has been quiet recently, many leading climatologists expect robust activity for many years to come.

Second, with one of the most significant senior citizen populations in the nation, it is understandable that healthcare services should provide significant ballast for the local economy. Medical insurance and government-supported programs such as Medicare drive a meaningful share of healthcare spending, so it seems reasonable to expect that South Florida's future economic fate may hinge in part on the outcome of healthcare and medical insurance reform, which may take months, if not years, to be fully realized.

Finally, the financial sector, including banking and wealth management, especially for seniors, is another area with critical unresolved issues. With the assistance of government and other public agencies, the banking sector seems to have stopped short of ruin. However, its future viability still faces significant global economic headwinds and national politics may impose further fate-changing reform and regulation on that sector. Those facts, the reality that personal wealth has dramatically fallen since 2007 and low interest rates conspire to naturally depress senior incomes and wealth management fees, all of which means that the future of Florida's financial industry is tentative at best.

Wall Street Banks argue for Bonus Compensation Billions after losing Trillions

2010-01-13T12:59:00.001-05:00

Wall Street bank executives are under fire for their ridiculous compensation packages in advance of annual bonuses that will be announced and awarded next month. So far, pundits have offered three arguments for not limiting Wall Street bonus compensation. First, they say that “government should not interfere with private enterprise,” which is a premise I normally wholeheartedly endorse. However, since the Great Depression, the global banking industry has had a strong if not incestuous regulatory relationship with government. The failure of Bear Stearns and Lehman Brothers and the subsequent actions of government to prevent the failure of probably all the rest of the world’s major banks and financial institutions are the very reason they still exist to allow their leaders to haggle today about how high their paychecks should be. Moreover, the reason the banks are recovering so quickly is primarily because the government is lending them money virtually interest free that they can reinvest at much higher returns. Not only don’t citizens enjoy such investment favor, but between TARP and low bank rates, we as taxpayers and bank depositors are paying to fix the banking system.

The second reason offered is that “it is difficult if not impossible to structure compensation so as to mitigate bank failure risk” and glib advocates of that perspective will point out that the obvious alignment of interest between the crew and passengers of the Titanic wasn’t enough to keep that ship from sinking. However, common sense and various studies indicate that long term non-cash compensation structures such as the awarding of restricted stock, especially with claw-back provisions, offer clear incentives for superior management performance.

Lastly, pundits arguing the bank executives’ cause say that “limiting bonuses will cause an exodus of talent from the top banks,” which would be laughable if it wasn’t so desperate and pathetic a statement. Isn’t the so-called “top talent” at banks at least partially if not primarily responsible for the financial debacle of the past few years? If they truly want to be paid for the value they create, they should receive a bill for the damage they have done to our economy and financial system, instead of receiving a bonus. So far the cost of the global financial crisis has been estimated north of $12 trillion, the equivalent of one-fifth of global economic output, and nearly $3,000 for every person on the planet! By that measure one could easily argue that top bank talent is being overpaid, whatever their rate of compensation.

Besides, with the failure of so many major financial institutions, clearly the supply of “top talent” exceeds the current demand for their services, as the number of top-tier banks has shrunk considerably in recent years. The competition from all those unemployed Wall Streeters should drive down the price of “top bank talent” for many years to come.

US Economy: Between Barack and a Hard Place

2009-10-19T12:27:00.002-04:00

Most TV talking heads have us believing that our short term economic recovery requires us to spend ourselves into financial oblivion. They say that curtailing runaway government spending right now would be repeating the mistake made by the Japanese government in the 1990s, which ultimately caused its economy to flat line into a “lost decade.” The point resonates with many Americans who believe that "you don’t get something for nothing," that there is indeed no "free lunch," and financial sacrifice is the only path to economic salvation. They believe that high (even hyper-) inflation, high taxes, the continued and deep devaluation of the dollar and slow economic growth are merely the penance for our financial sins.

The fact is that the spending spree of the past year has done very little to stimulate our economy. The timely, temporary and targeted stimulus package outlined by economic advisor Larry Summers never actually materialized. Instead, the Obama-blessed Pelosi-Reid $787 billion abomination of gratuitous spending and political pork turned out to be untimely (most of the money still hasn't been spent) and targeted just about everything EXCEPT projects designed to pay immediate economic dividends and put Americans back to work. Besides all the pork, a significant portion of the stimulus money was earmarked to prop up state governments and social welfare programs designed to provide a safety net to Americans in greatest need. Helping Americans in need is a noble cause, but using the money for consumption instead of for investment in America’s business prosperity does not stimulate the economy.

The good news is that if we scrap all that nonsensical spending right now and fund a plan that actually targets stimulating the economy, we may be able to have our cake and eat it too-- a robust recovery in the near term and a chance for long term prosperity. If our political leaders come to their senses and call off the stimulus waste-fest, nix multi-trillion dollar Obamacare and anti-business Cap and Trade, and redirect a fraction of those savings toward creating jobs, we may just start growing again. Robust growth will mean lower deficits, lower deficits will reduce the need for higher taxes and the impetus for high inflation, and just might save the US dollar from near extinction on the world stage. That lunch wouldn't be free, but it would be cheaper and provide leftovers that could be used to fund responsible healthcare reform and other social goodies!

Investing in a Deflationary, Reflationary and Inflationary Economy

2009-09-21T13:27:00.001-04:00

If you’re not confused by this stock market, you’re probably not paying attention. The Dow-Jones Index halved from an all time high of more than 14,000 in October 2007 to less than 6,600 in March 2009. From March until September 2009, the index increased 50% to 9,800. Many pundits now believe that a new bull market is emerging and just as many believe a correction is coming; some believe the pullback may retrace the March lows.

The optimists believe that the speculative bubble is now deflated, reflation is well under way and that a modest correction may be coming merely because the market rallied too far too fast. They see investor sentiment as too bullish and point to retail investors pouring money back in the market as an indicator of a temporarily overheated market. (In March, cash amounting to 46% of the total value of our equity markets was parked in money market accounts, but by September that ratio fell to 30%.)

Pessimists, however, believe that the current market recovery is temporary and point to significant economic problems yet to be addressed. They believe that the looming risk of deflation will cause the coming correction to be protracted and severe; they also believe continued problems in the financial sector could catalyze another major deflationary spiral.

The consensus among optimists and pessimists is that unprecedented global government spending and deficits will eventually lead to robust (if not hyper) inflation. The pessimists, however, also believe that all those “reflation efforts” will prove insufficient to keep the world economy from returning to the brink of collapse. They argue that all the spending and expansive monetary measures should continue until deflation is realistically off the table. The Great Depression was the last major deflation, so even today’s experts are unfamiliar with the phenomenon and, as a result, are much more frightened by it than the more common inflation. Ample anecdotal evidence suggests that the risk of deflation should be seriously considered:

The goal of delevering the global economy to a debt-to-global-GDP ratio half its peak of 400% will require, for example, a 30% global debt reduction and a 30% increase in global GDP. That process will be difficult and will take liquidity out of the global economy. Current global government spending in the trillions may still not be enough stabilize the deflationary vacuum caused by eliminating all that debt;

Consumer prices continue to fall as debt-overextended consumers curtail their discretionary purchases in an effort to firm up their personal balance sheets. Private consumption representing 70% of the US economy is unlikely to bail us out of our economic doldrums as it has in the past;

The US recession may be finished, but no one expects a robust recovery. Continued rising unemployment and slow growth will exacerbate tepid consumer demand and the delevering process;

Banks are still failing at an alarming rate and many believe a looming crisis in commercial real estate, consumer credit and all types of derivative products are the proverbial shoes waiting to drop that could stress an already fragile global financial system. Additionally, financial reform designed to prevent the problems that caused this crisis is still lacking and, in fact, irresponsible mortgage lending practices continue, ostensibly to bolster otherwise lackluster residential real estate sales;

Residential real estate prices continue to fall in many major metropolitan markets;

Bank lending continues to be minimal relative to the huge amount of liquidity created by an expansive monetary policy, and money velocity remains very slow; and

Many knowledgeable investors are leery of investing in the stock market, even with this summer’s robust rally. Corporate insiders are selling shares more than usual and cash on the sidelines, at 30% of total equity value, is still well above the typical 20% average cash ratio. What do they know that we don’t?

Governments around the world seem to be cooperating to fight deflation, but what if all that reflation is not enough to plug the multi-trillion dollar hole left by disappearing debt? Additional stimulus is always a possibility, but lowering interest rates already near zero won’t add much stimulus. Japan learned those lessons the hard way in the early 1990s and is still in the economic doldrums today!

Moreover, and assuming we successfully dodge a deflationary spiral, a long period of significant world-wide inflation is likely to result from all that monetary and fiscal stimulation being employed right now. That will be bad news for economic growth, but global governments will actually benefit as high inflation over a long period of time will reduce the real cost of all that government debt and make it cheaper to repay. Governments know this and often inflate out of their debt. That fact alone almost guarantees that inflation is in our future. Some believe gold’s recent steady price rise is already signaling the inevitability of future high inflation.

Obviously, no one really knows if any of this will play out in reality. But if you subscribe to the deflation theory, you should probably sell into the current stock market rally, patiently collect cash and wait for the opportunity to reinvest when the market tanks. Also, if deflation is indeed coming, now probably isn’t the best time to borrow money or buy a house. Deflation will make borrowing more expensive in real terms and will obviously impair the real value of your home. If deflation does occur it is likely to be triggered by some economic or geo-political panic event and likely to persist for several months if not years.

If you don’t subscribe to the deflation theory, but believe high inflation is coming, you should consider repositioning your portfolio and invest selectively, especially in proven inflation hedges such as gold, oil, commodities, real estate, and other tangible assets. Furthermore, if you believe the US dollar will weaken relative to other currencies because of inflation and other factors, investing abroad or in US companies that export or otherwise earn significant income abroad probably makes sense too.

Many knowledgeable investors expect some type of correction (minor or major) within the next several months, early-to-mid 2010. In addition, some expect the Fed to start tightening as early as late 2010, which suggests that deflation risk should be significantly reduced by then and replaced by inflation as the dominant price stability concern for policy makers. A significant increase in bank lending will be another sign that inflationary pressure is building.

Are you optimistic or pessimistic? Are you more comfortable missing a market rally by selling your investments in anticipation of deflation, or ignoring the signs of deflation, riding the current rally and risking your gains on a potential big correction? A realistic assessment should probably weight each possible outcome as equally likely. Consequently, now is probably not the right time to go all in or stay completely out of the market.

Foreign Critics of US Government Spending Should Rethink Their Opinions

2009-09-15T13:33:00.001-04:00

Foreign critics envious of America’s robust consumption and spending are taking some pleasure in seeing America struggle through its current financial crisis. However, as they celebrate our misfortune they should realize that they too have benefited from our excesses and if the golden goose dies, they too will do without its seemingly endless generosity.

By all historical measures, America is straining its purse strings. Current budget deficit and government spending estimates as a percentage of GDP are 12% and 28% respectively, and are unacceptably high levels not seen since World War II. US debt as a percentage of GDP is currently 45% and is projected to nearly double in the next ten years.

America is particularly fortunate that its sovereign friends around the world are willing and able to lend us the money we need to sustain our nation. But those lenders are being more than fairly compensated for their support. China, Japan and other nations lend us money by buying our interest-paying bonds, the most risk-free investment available, all to give us the wherewithal to buy their exports and pay for, among other things, the one trillion dollars the US spends annually to maintain the peace and security of the planet we all share. That security provides the backdrop of certainty and confidence that all the world’s nations need to grow their economies, trade freely and ultimately improve their quality of life. As such it should be obvious that our lenders have as much at stake as we do. Don’t you wish you could lend money to our government virtually risk free, instead of paying income taxes, for the services you receive?

Additionally, the US spends by far more than any other nation on global humanitarian endeavors. Even our enemies that engage us in warfare are compensated in defeat. After World War II, America practically rebuilt Europe and Japan. Plans for how America will rebuild Iraq began almost simultaneously with the war itself several years ago. Currently there are serious discussions about building infrastructure in Afghanistan as part of a strategy to achieve a victory there. Don’t you wish your conquering enemies were as kind to you?

Everyone should be rooting for America to get its fiscal house in order for our sake, and for the sake of our friends and our enemies.

Reforming Obamacare

2009-09-11T13:30:00.002-04:00

The president addressed a rare joint session of Congress Wednesday night and rather eloquently laid out his "wish list" for healthcare reform (“Obamacare”), this time with specific talking points about who and how Americans will benefit. As far as program details or how it will be financed, the president either isn't saying or doesn't yet know.

The president's lack of transparency and detail coupled with the government's long history of profligate entitlement spending makes it easy to understand why Americans are reluctant to buy into the president’s program, especially when the reform narrative keeps changing. The original priority was to insure the 47 million uninsured, but quickly turned to overhauling our entire healthcare system, one that according to polls satisfactorily serves 75 percent of the 250 million insured. Called out by protesters at the prospect that taxpayer money would subsidize healthcare for illegals, the president changed his tune and referred to 30+ million uninsured and assured us that illegal aliens will not be insured under his program.

Originally, healthcare reform was going to be substantially paid for with cuts in Medicare and new taxes on the wealthy. Seeing backlash from seniors probably led the president to rethink that approach and definitively say that there will be no Medicare cuts to pay for Obamacare. The president is now saying that half the costs of Obamacare can be paid for by eliminating the waste, fraud and inefficiency from the existing system. That's a difficult one to swallow especially knowing that one of the House proposals calls for 53 new government bureaucracies to be created under Obamacare!

President Obama is urging us to “trust him,” but has not earned that trust. Critics of Obamacare point to language in the various proposals that refute many of the assertions made by the president in his speech. The president hasn't backed up any of his statements with any details or actual documentation. In addition, he "sold" us Obamacare by hyping the positives, without acknowledging even the possibility that there will be unintended and potentially negative repercussions from such comprehensive and complicated changes to our system. Finally, his stimulus plan early this year showed us that he has neither the experience, expertise nor the inclination to add value to his own programs.

Notwithstanding all the evidence to the contrary, the president says that he is seeking incremental reform that fixes the problems with our system. If he truly means what he says, his “incremental” reform should consider the following common sense suggestions:

Enable interstate competition among insurance companies. Greater competition among insurance providers should lead to cheaper insurance for consumers. We buy our home, auto and life insurance in a national marketplace, why shouldn’t we buy our health insurance there too? Instead, Obamacare proposes to create some type of national exchange for insurance companies. Apparently, no one knows how it will work, including the president.

Eliminate mandates for minimum insurance coverage. One reason health insurance is so expensive is that we’re forced to buy insurance for every conceivable health condition and situation. Again, Americans select their home, auto and life insurance by making choices among coverage alternatives, why should health insurance be any different? Let consumers select from a menu according to their own needs, once their basic needs are met. Healthy young people, for example, who otherwise would not seek any insurance, should be encouraged to purchase “catastrophe insurance” to insure against major events that can potentially strike at any time.

Reform medical malpractice law (tort reform). The president mentioned tort reform last night, but his comments clearly indicate that he has no intention of taking decisive action in the time frame contemplated for his reform package. Many believe tort reform is critically needed in order to contain future healthcare costs. If the president is serious about reforming healthcare, he needs to put aside the long-standing allegiance of the democrats to the civil trial lawyers of America.

Tort reform refers to making changes to our civil justice system that would limit the incidence and monetary awards arising from litigation. Should victims of medical malpractice be compensated for their misfortune? Absolutely, but does the average settlement need to exceed a million dollars, and should that practice be allowed to paralyze and potentially bankrupt our healthcare system? Approximately one third of our healthcare costs are driven by “defensive” medicine and more than 80 percent of U.S. doctors admit they require unnecessary tests for their patients just to avoid potential patient lawsuits arising from alleged negligence on their part. Tort reform has the potential to save $100 billion annually in healthcare costs and any proposed reform of healthcare should address the cost, waste and inefficiency created by the current law.

Provide tax incentives to individuals who purchase health insurance. Employers and businesses pay for employee insurance premiums with after tax dollars, why shouldn’t all of us be able to do the same?

These ideas have the advantage of being straightforward and can be implemented incrementally. I hope the president will keep his promise and seriously consider them for his healthcare reform program.

Consumer Banking Tip: the Devil is in the Details

2009-08-31T14:03:00.002-04:00

As the euphoria of averting the collapse of the world’s banking system wears off, it is clear that banking’s halcyon days have ended and its road to full recovery will likely be long and difficult.

The good news is that the Fed is managing to keep the yield curve steep. As a result, banks today are able to borrow money effectively for free (have you checked your bank’s interest rates lately?), lend at much higher rates and thereby generate significant profit margins. And, with tons of cash parked in banks and reluctant to move back into the stock market, total bank profits are likely to continue to be substantial. Those profits will be needed to ultimately offset the unprecedented asset losses and write downs continuing to occur on bank balance sheets.

The bad news is that all the pending bank failures, mergers/acquisitions, and cost reductions are negatively affecting the quality of the customer experience. Bank staffs are increasingly short-handed, untrained and inexperienced, and with banks revising their operating procedures according to those of new corporate acquirers and new federal banking regulations, it is no wonder customer service is suffering.

Even the banking giants likely to survive and thrive in the future are as deficient in their customer service as many of the smaller community banks that will likely disappear from the treacherous banking landscape during the next few years. Consequently, in order to insure a satisfactory level of customer service, customers will need to take a more active role in managing their banking. The following tips should assist you in that mission:

Know the FDIC insurance rules and limitations. Make sure you set up your accounts in compliance with those rules and that your accounts are fully FDIC insured. Bank personnel don’t always communicate accurately or completely when answering questions about those issues. However, many banks will offer you a free FDIC brochure that tells you everything you need to know on the topic, or you may download it yourself directly from the FDIC via the internet.

Banks believe that paper is so twentieth century. Many banks will do almost anything to avoid giving you a paper receipt that specifies the important details of your account, such as the interest rate, expiration date, balance, etc. Many look at you dumbfounded when you remind them that CD is the acronym for “Certificate” of Deposit. They sincerely believe that in this age of online account management hard copies that verify that you’ve turned over your life savings to them are completely unnecessary. Insist on receiving that paper receipt, as it is often useful in revealing clerical mistakes that you will then be able to correct immediately.

Verify account tax IDs. Always check the accuracy of account tax identification numbers, which are typically social security numbers for individual accounts. Do it every time you receive an account correspondence or statement. Wrong numbers on year-end tax forms, such as 1099s, may lead to problems when you file your income taxes. Don’t be surprised if you find yourself reporting disparities often, as some banks claim to have several files for accounts all of which do not automatically revise your change. Another typical excuse for such errors is that bank computer software may override and undo revisions according to some corporate compliance measure. Banks readily blame their computer software for many of their administrative screw ups.

Account titles can be problematic. Pay very close attention to how you title your accounts. Trust accounts can be particularly confusing, even when titles are specified by competent legal counsel. A typical trust account title might be “John Doe Revocable Trust UA (under agreement) dated 01/01/09.” The next line usually indicates the names of the designated trustees, in this example let’s say “John Doe and Jane Doe Trustees.” Such simple time-tested legal language should be foolproof. However, that language is often ambiguous to bank lawyers and their amateur acolytes who administer your account. Some interpret the “and” between trustee names to mean both trustees must sign off in order to execute transactions. They believe that if the intent is to have either trustee act unilaterally, then the title should read “John Doe or Jane Doe trustees.” Others believe that if the intent is to have either trustee act unilaterally, the title should refer to them as “co-trustees.” When the lawyers don’t agree, everyone in the bank gets to offer an opinion. By the way, your opinion doesn’t count.

Keep bank account-related documents handy. Periodically, and certainly every time a bank is acquired or merged with another, new account administration procedures are implemented, which often require account owners to verify the ownership structure of their accounts. Be ready to take all pertinent documents to the bank frequently to satisfy those new requirements. As unfair as it sounds, banks apparently take no responsibility for verifying once-and-for-all your authority over your accounts, so be prepared to clarify your accounts periodically.

Avoid automatically renewing CDs and other savings accounts. Do not lose sight of the fact that most banks exploit your laziness or lack of vigilance to seek the best financial terms for your accounts. In the old days, expiring CDs were automatically rolled over with the reasonable expectation that your renewal interest rate for a certain term would compare closely to the prevailing rate for that term shown on the market yield curve. Today, promotional rates are offered for bank-favored maturities and all other rates are set artificially low. Those bank-favored maturities change frequently, which almost guarantees that your account with its set maturity will not receive a favorable rate upon automatic rollover. Worse yet is the fact that promotional rates are often two or three times greater than the rates for other maturities. So, if you miss the promotional rate, you are likely to receive a mere fraction of the prevailing market rate for your account. You must actively manage your CD rollovers.

Frequently monitor money market account rates. A casual inspection of your monthly money market account statement will often reveal a slight but continual reduction in your interest rate every month, even though other current money market rates at your bank might be much better. You need to actively manage your money market accounts and inquire constantly about upgrading your account to prevailing money market rates.

Beware of bank investment services. It’s bad enough you need to struggle to get a banker’s attention to assist you with your legitimate account needs, but these days you must fend off the army of bank-sponsored financial consultants who may be trawling your accounts in an effort to entice you to invest your bank account money into non-bank (non-FDIC insured) and often much riskier types of investment accounts. Be able to differentiate between bank and non bank types of accounts.

Avoid banks that really don’t want your business. You may have already noticed that banks seem unwilling to offer preferred customer rates for savings accounts and loans unless you are willing to make some concession to them, such as opening a direct deposit savings account or checking account. In the current low interest rate market environment preferred customer rates are substantially more favorable on a percentage basis than other rates. Clearly, they don’t want your business unless you submit to their concessions and you don’t need their below market rates. So, do them and yourself a favor and consolidate your banking needs with a few banks. The recent decision by Congress to extend until year-end 2013 the FDIC insurance increase, from $100,000 to $250,000 per account, will make that consolidation easier for everyone.

What if Big Brother (Government) Turns Out to be a Bully?

2009-08-20T14:35:00.001-04:00

Harsh recent criticism of our free market economic system has resulted from the long standing belief that the greed and self-interest that drives our private sector were the major culprits of our current financial and economic mess. Some of those critics now believe that government control and regulation offers the only solution to the problem and many elected officials are seizing the opportunity to insinuate government into many of our major industries, including automobiles, banking, energy, healthcare and many others.

Although the free market system is far from perfect, history has clearly demonstrated its superiority to all others, especially systems where government has primary responsibility for driving the economy. And, if “greed” and “self-interest” are the catchwords of private sector capitalism, “corruption, waste and inefficiency” have become common descriptors of the public sector and government.

Furthermore, somewhat ironically and despite the rap against the private sector, it is clear that government was complicit in the acts that led to our financial debacle. First, during the prosperous 1990s the Clinton Administration paved the way to financial ruin by implementing a public policy that encouraged home ownership among our most economically-challenged and pressured banks into providing financing that ultimately led to an explosion of sub-prime mortgage lending. That policy, coupled with others that encouraged banks to lever up their balance sheets as an easing monetary policy reduced interest rates to multi-generational low levels, created a financial maelstrom we have barely been able to escape. In addition, the Bush Administration, by its own admission, knew this disaster was coming and claims to have urged Congress to take preemptive action to prevent it. It should have tried harder.

America is now being asked to choose between the free market’s invisible hand and the dictatorial hand of government. A free market system allows us to choose the products we wish to consume; it relies on prices set by the interaction of supply and demand, which ensures that suppliers offer products consumers want to buy. A government run economy encourages us to vote for public servants who we must trust will represent our interests; it relegates production decisions and who and how much we consume to public sector bureaucrats. Do you want the government telling you what car to buy, how much energy to consume, and what healthcare you will receive?

If you still believe bigger government is the answer and have faith that our government will serve our best interests, consider the following: First, even though government does not take private sector pride in greed and profit motives, it trades money for power and plenty of both is involved in greasing the gears that drive government and its participants. Second, many of those wanton capitalists from the private sector ultimately seek government office, and not necessarily because they feel an overwhelming desire to serve the public. Third, Barack Obama did not become president by accident; he had the greatest financial backing of any presidential candidate in history, especially from the liberal rich and famous, and received a resounding if tacit endorsement of most of the mainstream (read liberal) media. Contributions to all election campaigns last fall totaled more than one billion dollars and media support for Obama’s candidacy could not have been more apparent. It should be no surprise to anyone that our president (who campaigned as a moderate) should be pushing an emphatically liberal agenda, instead of pursuing the center-right interests of the American public who voted for him.

The last 100 years of world history has proven that economies work better as free markets than under government control. But even capitalists know that there is a role for government to play in correcting the failures of free market capitalism. That’s what our government should be doing, not attempting to supplant our free market system altogether.

Obama and Bernanke-- U.S. Economy’s Yin and Yang

2009-07-26T15:32:00.004-04:00

There is a tug of war of negative (yin) and positive (yang) energy in our economy evidenced by a stock market that cannot seem to break free from a very tight trading range. Over the past year the Federal Reserve, led by Ben Bernanke, pumped an unprecedented amount of capital into our economy to keep a fragile financial system from falling apart. At the risk of completely trashing the dollar and potentially igniting a high (even hyper) inflation rarely witnessed in the northern hemisphere, the Fed lowered and has kept interest rates near zero since late last year. It also exploded its balance sheet by trillions of dollars by buying a variety of government and mortgage-related bonds. The Fed's plan was to reinforce the financial system by flooding the market with liquidity in the hope that all that cash would encourage banks to lend and individuals and businesses to spend, invest and ultimately spur economic recovery.

Despite all that capital and the bailout of our financial system by TARP, bank lending has continued to languish. Banks have cited poor borrower demand as the cause, but the fact is that banks are terrified to lend. They have been to the brink of extinction and have been forced to submit to government control in order to avail themselves of the capital needed to survive. They fear that even the strictest of lending criteria may not keep them from falling further into the financial abyss as asset values (loan collateral) continue to fall; they also dread the prospect of ever having to seek additional capital from the government. In addition, the Obama administration’s willingness to change the rules of the game and to abrogate the rule of law in order to further its political agenda has compounded those fears and has contributed to an environment too uncertain and risky to justify new investments.

As experts extend their expected time frames for economic recovery, the banks know that conditions are unlikely to improve in the short-to-medium term, and could indeed be exacerbated by the president’s continued priority to implement the most liberal agenda in our nation's history. The stimulus plan executed last February has thus far proved to be a bust and a growing consensus believes his current “cap and trade” and “healthcare reform” initiatives could have catastrophic effects on the economy and our exploding government deficit. Furthermore, the president’s stated intention to raise taxes on investment capital and small businesses is providing a backdrop of negative energy that could hold both the economy and the stock market hostage for many years to come.

Aggravating an already bad situation is the possibility of replacing Mr. Bernanke when his term expires early next year. The real concern would be if the president replaces him with an individual more sympathetic to his own thinking. That would not only taint the historically arms-length relationship that has existed between the executive branch and the Fed chief, but it could also suck out all the positive energy currently being provided by the Fed. The prospect of replacing Mr. Bernanke is especially ironic because it would appear that replacing Obamanomics with more traditional policies might be just what our economy needs now. Have you noticed that the market seems to rally lately at the slightest hint that the president’s policy initiatives may not pass muster with Congress?

I am hopeful that Congress, especially blue dog democrats, will press the Obama administration to abandon its politics for the sake of our economy and that it will do so before our nation’s yin and yang becomes Cheech and Chong, and sends our economy and our future irretrievably up in smoke!

Ascent of Money: Must See TV Documentary

2009-07-24T15:02:00.001-04:00

This interesting and relevant TV documentary is currently viewable in South Florida at 9pm Wednesday evenings on PBS. The documentary is presented in hourly installments that roughly track the chapters of Niall Ferguson’s 2008 book titled The Ascent of Money. Each segment, narrated by its author, examines milestone events from world history from the perspective of their financial and economic roots. In a few short episodes, it has already answered questions that had never even occurred to me, for example: Did you know that the French Revolution had its roots in a government-created speculative investment scheme that occurred in France decades earlier? Did you know that the U.S. Civil War’s turning point might be traced to the role of cotton in financing the war and the Confederacy’s loss of control of the City of New Orleans? Did you know that world bond markets were borne out of the need for capital by Europe’s sovereign powers to finance wars?

Particularly noteworthy for its relevance today is episode six, titled “the return of risk,” which directly relates to our nation’s current debate about the role of government in our financial crisis and for bringing about an economic recovery. That episode discusses the historical tendencies of societies to “nationalize risk” by making governments responsible for the risks its citizens face; it introduces the welfare state and identifies the apparent successes and failures of a few examples from history, including the United Kingdom, Japan, and Chile.

The episode also makes the point that while some welfare states are considered successful in their ability to satisfy basic societal needs, none has been particularly prosperous economically. For example, the author suggests that Japan’s welfare state may be at the root of this otherwise industrious nation’s inability to recover from its economic collapse more than a decade ago. And, in stark contrast to Japan, Chile’s ability to climb out of its economic doldrums might be attributed to its overhaul of government in the mid 1970s and its institution of a new capitalism.

Those are important comparisons and relevant situations to consider as we witness the rapid expansion of our own government according to the apparent liberal agenda of the Obama administration. You may find, as I did, that episode six provides an insightful perspective from around the world about the historical successes and failures of these ideas, and some useful context as the debate over government intervention in our economy and our lives rages on. Episode six is must see TV, especially for the most civic minded among us.

After viewing half of the episodes, I am confident that business and non-business types alike will find viewing this entire series worthwhile for its sheer novelty, entertainment value as well as its eye-opening perspective on much of the history you “thought” you learned years ago in school.

Congress Must Veto Cap and Trade and Healthcare Reform Legislation

2009-07-20T16:15:00.002-04:00

In this uncertain and fragile economy, it should be apparent that the decisions to approve or reject proposed Cap and Trade and Healthcare Reform legislation may be among the most critical our lawmakers have made in decades. The good news is that with each passing day the costs and benefits of each proposal are becoming clearer and a growing consensus is building that each proposal should be emphatically rejected by both Houses of Congress. Each piece of legislation represents the worst of the liberal agenda of this administration, is likely to cost our economy dearly and will not accomplish its stated goal.

Cap and Trade is intended to mitigate global warming. That was tried and failed in Europe and without participation by China, India and other emerging industrial economies, it will fail this time too. However, the charade will cause electricity costs to skyrocket and inflate the cost of virtually everything we consume. It will also encourage U.S. industrial companies to move abroad, where they can avoid its onerous limitations, and take our jobs with them. At the moment, Healthcare Reform proposals favor some form of government-controlled or sponsored program. Those proposals will likely bankrupt the nation. We need healthcare reform that will expand insurance coverage to everyone and improve the quality and availability of healthcare for all of our citizens. That reform will also need to pay for itself and keep costs from skyrocketing over the long term.

Some believe that the pending bankruptcy of California, New York and New Jersey, bastions of liberalism and free government spending for decades, offer a glimpse of the future of America, if either piece of legislation, as proposed, becomes law. Those states are attempting to hold their state legislatures accountable for their respective predicaments, and some are contemplating rewriting their state constitutions in order to prevent irresponsible government action in the future. We should hold the U.S. Congress similarly accountable for its actions before it’s too late for our entire nation.

It is a pathetic fact of life that Congress cannot always be trusted to act in our best interest and even more pathetic that our only recourse as a nation is to vote its members out of office years after the damage has been done. After more than two hundred years of weeding out the bad through elections, the best we have been able to do is to seat a Congress that has difficulty abiding our own laws and upholding the public’s trust. The sad truth is that, with far too few exceptions, many of these men and women might be serving time in prison if they had not been elected to serve time in Congress.

However, as trustees of our government, Congress does have an obligation to act in the nation’s best interest. I fail to see how hastily ramming through either piece of thousand-page-plus significant legislation, especially without reading it (as they did the stimulus plan earlier this year), is in our nation’s best interest. The effective dates for most requirements imposed by either—Cap and Trade or Healthcare Reform—is many years in the future, so what’s the rush?

Absent any real recourse, Congress should be required to “eat its own cooking” and feel firsthand the impact of its actions. It should be forced to consider the impact on global warming of its members jetting off to attend frivolous engagements. If Congress’ actions fail our economy, its own ranks and million-dollar office budgets, paid for with tax dollars, should be streamlined accordingly. Furthermore, congressional pensions should shrink as social security and Medicare benefits shrink and Congress should be prevented from raising their salaries until the economy substantially recovers. President Obama campaigned for healthcare reform by proposing healthcare insurance for everyone similar to that enjoyed by members of Congress and I hope he keeps his promise. If some version of the current healthcare proposals passes into law, I look forward to chatting with my local congressman as we wait in line for hours to see our doctors.

Bernie Madoff Needs to Come Clean

2009-06-30T13:16:00.002-04:00

Bernard Madoff, perpetrator of the crime of the century that spanned probably three decades (and two millennia), was yesterday sentenced to a measly (if maximum) 150 years in prison for his multibillion-dollar Ponzi scheme. Madoff's defense attorneys had sought a laughable 12 years, which would have offered the scoundrel the possibility of seeing freedom at the ripe old age of 83.

Manhattan District Court Judge Denny Chin threw the book at Madoff in order to send a clear message to the world that a man capable of such "extraordinary evil" should be shown no leniency. Judge Chin said he was especially moved by a letter he received describing how Madoff conned an 86-year-old widow by putting his arm around her and told her not to worry, that her money was safe with him. The judge also noted that he had not received a single letter from friends or family coming to Madoff’s defense. Madoff's thousands of victims are estimated to have lost $13 billion to nearly $65 billion of their wealth. The rest of us have lost our faith and trust in our financial system, our government's ability to protect us and in humanity itself.

Does a 150-year imprisonment represent real justice for Madoff? Burt Ross, a Madoff victim and a former mayor of Fort Lee, N.J., who lost $5 million with Madoff, said he was satisfied with the sentence and that Madoff deserves to go to his grave "an unmourned man." However, in a letter to the court, Mr. Ross also wrote that Madoff's crime "far transcends the loss of money, it involves his betrayal of the virtues people hold dearest—love, friendship, trust—and all just so he could eat at the finest restaurants, stay at the most luxurious resorts, and travel on yachts and private jets. He has truly earned his reputation for being the most despised person living in America today." Mr. Ross's words have persuaded me that much more needs to be done not merely to punish Madoff but to learn from his crime, prevent its recurrence and to restore our faith in our financial system and in each other. (Mr. Ross's full letter invokes vivid imagery from Dante’s The Divine Comedy, is available at The Daily Beast and is well worth reading in its entirety.)

Keeping Madoff from being murdered by any one of his victims and allowing him to spend the rest of his natural life in prison, at taxpayers expense, is not nearly enough punishment, especially if Madoff ends up in anything less than the most horrific penitentiary imaginable. Madoff has robbed thousands of their life savings, their families of their dreams and has caused some to take their own lives.

Has he shown any remorse for his repeated and continuous acts of betrayal, fraud and complete indifference toward the welfare of others? I think not. His courtroom speech shortly before sentencing was a half-hearted plea for his own leniency and a manifestation of self-pity. A true act of contrition would include, at minimum, his full disclosure of how he perpetrated the crime and an identification of others, including members of his own family, who assisted him. He also needs to either relinquish the remainder of the wealth he has stolen over the years and secretly stashed away somewhere, or convince us there is none.

Our legal authorities need to show Bernard Madoff no mercy unless and until he fully cooperates with them and answers all the requisite questions. Until that time, his incarceration should be as unpleasant as legally possible and should allow each and every one of his victims an opportunity to torment him each and every day until he comes clean or dies.

Obama’s Healthcare Prescription for America

2009-06-26T12:06:00.003-04:00

America's understanding of healthcare reform needs to move beyond news headlines and 30-second sound-bites toward a deeper understanding, and Wednesday night’s ABC-TV presentation by the president -- Prescription for America -- did little to further that cause. The president seemed to be over his head talking about the issue, which probably explains why the audience appeared distant, bored and even catatonic. Most of the audience questions and anecdotes were off-point and not relevant to the big picture and the president's comments seemed at times to be incoherent and confusing. ABC’s news anchors Charles Gibson and Diane Sawyer did their best to focus and clarify the discussion, but even they were unsuccessful keeping the session on track. It was 60 minutes of regurgitated Obama-ganda and not his best effort.

President Obama asserted that one-third of current healthcare costs are unnecessary, but didn't elaborate. He should have offered some details, such as where those unnecessary costs reside in the system. Is it with the doctors, the hospitals or the drug companies? Is it the routine doctor visits or the (hopefully) once-in-a-lifetime hospital stays that are causing the unnecessary costs? The president also said “we know what works and what doesn’t work” in providing healthcare, but offered no examples of either. One of the factoids posted on a slide before a commercial break indicated that 50% of America 's healthcare costs can be attributed to heart disease, diabetes and obesity. Important, big picture findings such as that deserve some commentary and clarification, wouldn't you agree? Specific answers and examples might have helped set the stage for serious discussion and debate, which was the stated purpose of his presentation. As important, they might have given the growing number of skeptics in America confidence that their political leaders and bureaucrats actually know what their talking about on the healthcare issue.

Furthermore, I was amazed that the president could talk for an hour about healthcare reform without even mentioning tort reform, which many believe is needed to contain healthcare costs going forward(and many other costs in our economy). If he is serious about reforming healthcare, he needs to put aside the long-standing allegiance of the democrats to the civil trial lawyers of America who represent a major party constituency.

Tort reform refers to making changes to our civil justice system that would limit the amount of, and monetary damages arising from, litigation. Should victims of medical malpractice be compensated for their misfortune? Absolutely, but does the average settlement need to exceed a million dollars, and should that practice be allowed to paralyze and potentially bankrupt our healthcare system? Anyone seriously attempting to tame our healthcare cost burden must at least put tort reform on the table for discussion. Serious omissions such as that undermine the administration’s credibility and confirm our worst suspicions about how politics can distort our nation’s most important institutions.

Some democrats contend that America 's economic survival depends upon successful healthcare reform and just as many republicans contend that democrat proposals for reform will push us further into an economic abyss. Most disturbing, however, is that lawmakers from both sides of the aisle seem to be approaching the problem piecemeal and from the perspective of what will sell politically, rather than what will successfully reform our healthcare system.

The Obama administration promised government transparency and post-partisan decision-making. Now would be a good time to make good on its promise. We need to engage in a substantive discussion of the real issues surrounding healthcare reform, not just those that will lead to a politically expedient solution.

Healthcare Reform Should Begin With Medicare

2009-06-16T13:44:00.000-04:00

The president spoke about healthcare reform again yesterday. The president seems to enjoy reciting the same talking points repeatedly, especially the innocuous platitudes everyone agrees with. We all agree healthcare is a huge problem and a major stumbling block for our economic recovery and long term prosperity. We all agree something needs to be done. We all agree reform will not occur unless we take action. The president added a factoid I had not heard before that, without reform, in 30 years $1 out of every $3 our economy produces will go to pay healthcare costs. (Within a decade it will be $1 out of $5.)

The president says he wants healthcare insurance for everyone in America, dispensed through a system that will allow everyone to select their own doctors and their own care, while saving taxpayers boat loads of money over the long term. How can anyone argue with those goals? However, is such a healthcare insurance plan possible? If the president thinks so, he needs to start showing us exactly how it would work. It is not obvious how his plan can add nearly 50 million of the currently uninsured to a reformed system that will maintain quality and availability of healthcare while saving taxpayers money. The Congressional Budget Office estimates that reforming healthcare will increase our budget deficit more than $1 trillion over the next decade, and speculates that it will ultimately be paid for with $600 billion from raised taxes and approximately $400 billion in cost savings from cuts to Medicare. Raising taxes makes no sense in this economy and Medicare cost savings will likely reduce the quality and availability of care for seniors.

The president denies allegations that he is seeking a single-payer insurance program sponsored by government, and claims his plan will enable us to keep our current insurance programs, if we so choose. However, some democrats and some republicans are skeptical, but for different reasons. Some democrats are betting that no one will want to keep their current insurance once they see the superiority of a government-sponsored plan. They believe the American public will abandon its current insurance plans and opt into the government plan. The republicans expect the government to artificially under price their plan until they drive private profit-making concerns out of business. Either way, America will end up with a single-payer insurance program, sponsored by the government. It will be the government’s way or the highway.

The obvious prototype for a new government-sponsored insurance plan is unfortunately Medicare, which continues to be a huge financial drain on our government and taxpayers. By the way, some believe that the availability of private insurance to supplement Medicare is the main reason Medicare works as well as it does. What happens if those private supplemental plans disappear?

Prudence and common sense should suggest that the president should do his best to fix Medicare before embarking on his ridiculously ambitious plan to overhaul our entire healthcare system. It should occur to him that if he is successful in demonstrating that he can devise a better and more cost effective Medicare program for our seniors, we would be far more confident in his plan to reform healthcare for the rest of us.

News Media Bias: Do You Know What's Really Going On?

2009-06-12T13:14:00.002-04:00

Technology makes the instantaneous and virtually ubiquitous observation of world events possible, but evidence of bias in the news media can make you wonder whether you can believe what you see and hear. World news is being transmitted by a global media, through a prism of sometimes deliberate and sometimes inadvertent bias.

The most timely and blatant example of bias in the media continues to be the coverage of President Obama, which began in earnest during his presidential campaign and has gathered momentum ever since. The mainstream media’s favoritism for Barack Obama during the general election was even more egregious than that alleged by the Hillary Clinton campaign during the democratic primary. Studies show that candidate Obama received more media coverage overall than other candidates and much less negative press than his opponents. The media’s extraordinary deference to the president often makes us wonder if the media is acting more as an eager extension of his public relations team than as a group of supposedly impartial journalists. They appear to be advocating rather than reporting on the president’s activities.

Members of the media would have us believe that the appearance of bias is a figment of our imaginations, but do not publicize the fact that more than a third of them identify themselves as liberal compared to less than ten percent who claim a conservative orientation. The media also does not readily admit that most journalists tend to vote emphatically democratic, and have done so for decades. Most interesting, however, is that although they fail to see bias in themselves, more than two-thirds of reporters, editors, producers, and executives of mainstream media outlets readily agree that Fox News is decidedly conservative. Are we really supposed to believe that the media’s obvious orientation toward liberal ideas and democratic candidates has no bearing on its objectivity? You may draw your own conclusions.

In addition to the obvious lopsided political orientation of the media generally, mounting commercial pressures in journalism are also causing many media sources to succumb to sensationalism in order to capture market share, attain popularity in ratings and ultimately to make profits. Is it any wonder that we question the integrity of our news media?

Bias takes many forms. Facts may be distorted in news stories or may be conveniently omitted. Newsworthy stories may be completely excluded from newspapers or TV programs or buried so far back in printed media, or so late in televised programs to insure that they are glossed over or missed altogether. Other sources of bias may be less obvious, such as when stories load up with expert testimony to support one viewpoint, or when stories use language to “spin” the facts to favor one side over another.

What is the average person to do in order to get to the truth? First, know the difference between news commentary or editorials and the news itself. The former is, by definition, opinion and likely to be biased; the latter is supposed to offer a balanced view of all sides of a story. Unfortunately, traditional news outlets, such as The New York Times, NBC, and many others, have blurred the line between traditional news reporting and opinionated commentary. On cable TV, chances are high that if a “news program” is interesting and entertaining, it is probably news commentary. Offerings such as “Hardball,” with Chris Matthews and “Hannity’s America,” with Sean Hannity are examples.

Second, ascertain the most knowledgeable sources and focus on individuals who substantiate their viewpoints with concrete examples or experience. I have found only a handful of politicians, government officials, industry experts, and media pundits that actually provide thoughtful insight and meaningful perspective on topics and issues. (Many commentators speak in generalities, make non-committal comments or repeat the mainstream view.) Verify the credibility of the sources you choose by researching their backgrounds and their affiliations on the internet. Understanding their backgrounds and professional ties may help you to verify expertise and identify conflicts of interest that may bias a source’s perspective on a topic.

Third, limit your news venues, such as newspapers, televised programs or internet-based media, to those offering the most substance and a broad range of perspectives. In addition, for national political, economic and societal matters, you should consider viewing C-SPAN, which televises congressional hearings, important speeches and other events on numerous topics. Although a time-inefficient medium, C-SPAN provides a valuable opportunity to hear directly from people creating the news, without the filter of a third party.

These are difficult times and decisions are being made today by our leaders that will have a far-reaching and profound effect on our lives for many years to come. As citizens of a free democracy, we have both a right and an obligation to get to the truth.

Stock Market Future: Will the Cyclical Bull Slay the Secular Bear?

2009-06-05T11:55:00.000-04:00

Even with a robust rally since March, the stock market has been net flat for more than a decade, in fact since the tech boom of the mid 1990s. The flat market performance is understandable because the run-up after 9/11 was more the result of financial engineering than it was due to fundamental economic growth. Artificially low interest rates, aggressive lending practices, exotic financial products and an overdose of false optimism “primed the pump” and propelled the market higher during those years. Those conditions evaporated in 2007 along with the balance sheets of some of the world’s most venerable business organizations and took the market’s heady performance with it.

The cyclical bull market refers to short term, intermittent rallies within a longer term, secular bear market trend. It is difficult to know when the bear will turn bullish, or what will ultimately cause the turn in the market and the global economy. However, against the strong headwinds of global recession and the urgent need to revamp and reduce the debt structure of our global economy, the catalyst for turning the market bullish will need to be far-reaching and transformational in nature.

That catalyst will not be the result of intentional action by government or the private sector, although government has so far been successful in delaying the seemingly inevitable collapse of our global economy and financial system. Various stimulus plans, the relentless growth of the money supply by the world’s central banks and the worldwide bailout of key financial institutions have probably kept us from complete financial disaster for the past couple of years. All government can do now is to implement policies and programs that encourage the private economy to invest capital, take risks and expand operations. The objective should be to boost investor and consumer confidence in order to keep the economy and stock market afloat until the relentless hand of progress propels us forward.

The impetus for propelling the market to new highs will likely come from some major technological advancement, in the same way that personal computers and the internet caused the market to boom some 15 years ago. In the early 1990s after more than a decade of solid performance, many predicted the stock market was doomed to a severe downturn. However, by the mid 1990s until the decade’s end, the market exploded like never before in its entire history. Many will give credit to the Clinton administration’s policies and programs, but the tech boom was obviously the driving force behind our prosperity during that period. This market will need that type of economic juggernaut to clear away the cobwebs and dispel its current funk.

Some new “game changing” technology will need to come along that will improve our lives. Perhaps it will be a new source of renewable clean energy, a cure for a major disease, a new technology to control weather, a commercially viable method of desalinating sea water, a discovery from space with the potential for widespread commercial application, or, who knows, it might result from a visit from outer space itself!

Our potential to advance our way of life is as strong as it has ever been, even though we face severe global economic conditions, limited natural resources, and a climate of global political unwillingness to manage our planet responsibly. It is the best reason I can think of to stay invested in this market.

If Obama's Right, Everything You Know Is Wrong!

2009-06-03T14:57:00.006-04:00

Are you having trouble wrapping your mind around some of the Obama administration's falsisms about the economy, energy, healthcare, national defense/security and immigration? You're not alone. Some personal favorites are highlighted below:

The government bailout of GM will save the company. It is not clear what "save" means in this context. The government has invested and/or committed $50-60 billion to GM for a 60% ownership share that's virtually worthless, so it would appear that "saving" GM doesn't include getting taxpayers their money back. The consensus is that the government will need to spend billions more continuing this charade in the future. The government is also forcing GM to build "green" cars Americans don't want to buy and won't be able to afford, because of the costly new technology and the still bloated labor cost structure of the UAW, the autoworkers union.

America doesn't torture, and, besides, torture doesn't work. I don't approve of torture any more than the next guy, but if the choice is to subject a few alleged scoundrels to minutes of discomfort in an effort to save thousands of innocent people from death, what would you do? The Bush administration claims that the government has documented proof that its methods (torture or otherwise) have worked and have saved many lives. We need to see that evidence to decide for ourselves and should not have to rely on interpretations from Nancy Pelosi and others. Torture may not always work but doing nothing certainly never works. Those who claim torture doesn't work obviously never thought about what it must be like to be subjected to torture themselves.

Healthcare reform will save us money in the long run. Is there excessive waste and corruption in our current healthcare system? Absolutely, and the Obama administration should immediately seek a private industry solution to the problem. Expecting the government to cut out waste and corruption in an enterprise and improve productivity and efficiency is a little like putting the fox in charge of the hen house. Have you been to a post office lately? Do you really want to spend several years and waste trillions of dollars to prove the obvious?

Wind farms and solar energy will help us achieve energy independence. This is pie in the sky nonsense, even if we devise a way to harness the hot air from a perpetually bloviating Congress and place mirrors in space to focus and concentrate solar energy into productive use on earth. Some are considering the latter and we all should consider the former, but while wind power and solar energy is clean, these technologies cannot begin to address our energy needs. Everyone knows nuclear power is the cleanest and most effective medium term alternative to solving our energy needs, although nuclear waste poses a significant environmental concern to some. If energy independence is a serious goal, nuclear energy should certainly be part of the solution. Also, any plan for near term energy self-sufficiency must also include expanding our own oil, natural gas, and coal resources, which are still plentiful .

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Reducing our national defense budget will make us safer. Spending money on defense may not necessarily improve our national defense, but neither does cutting defense spending, especially when the main tenet of the new plan seems to be to apologize to our enemies. Being "mean" to our enemies may anger them, but does anyone really believe that being "nice" to terrorists that think nothing of killing themselves is really going to make them stop terrorizing us? Did you ever confront a schoolyard bully? How did being nice work out for you?

Raising taxes on investments will not discourage investment capital. Really? Do you like paying sales tax when you go shopping? The fact that empirical evidence shows that lowering investment taxes actually raises tax revenue doesn't seem to faze this administration in the least. After the extreme market fallout of the past two years, the government should encourage private investment back into the market by all means possible instead of doing the opposite.

Building a wall between the U.S. and Mexico will not reduce illegal immigration. A wall may not guarantee border security, but common sense suggests that if you make it harder to traverse an area, it's going to be something of a deterrent. Preliminary evidence already suggests that extending the wall is helping keep out drugs and illegal aliens.

Many of the beliefs of the Obama administration seem to fly in the face of simple common sense, which apparently isn't so common anymore. The last time we took leave of our common sense we ended up with (and are still battling) one of the worst global economic calamities mankind has ever seen. Do we really want to repeat the mistake?

Soda Tax Will Not Reduce Obesity or Pay For Healthcare Reform

2009-05-28T14:44:00.002-04:00

The president is now considering a tax on sugary soft drinks (a “soda tax”), ostensibly to improve U.S. healthcare by focusing on “preventive care,” in this case, by mitigating obesity, a leading global healthcare concern. The real motive behind the tax is to partially offset the cost of the president’s healthcare reform plan. Ironically, Americans have gotten fatter over the decades by disregarding their expanding waistlines and the government’s soda tax idea is borne out of a necessity to reign in its steadily expanding fiscal waistline. However, much like curbing obesity itself, the government’s fiscal problem will not be quickly and magically fixed, especially with the imposition of one seemingly innocuous tax. Preliminary estimates are that a soda tax will raise a very small fraction of the billions of dollars that the president’s healthcare reform plan will cost.

The soda tax also lacks the fizz to address the obesity problem. Although high caloric intake is probably a major cause, soda is hardly obesity’s biggest culprit. Why single out sugary soft drinks? What about all those salty snacks and sugary junk food that all that soda washes down? Why not tax them all?

What about taxing our sedentary lifestyle? Lack of physical activity also contributes to obesity. These days most of us work with our heads, not our hands, and rely exclusively on motorized transportation even for our most trivial trips. Maybe we should consider taxing white collar jobs and local transportation.

Why not tax leisure activities that encourage us to become TV couch potatoes and provide the venue for consuming all of the aforementioned soda and junk food? What about taxing fast food vendors whose TV commercials encourage us to eat junk food? Or TV commercials generally, which cause us to eat out of boredom? What about taxing the video games or the Internet that keep us from physical exertion on weeknights, weekends and days off? Furthermore, the combination of no physical exercise, passive pastime activities and all those snacks before bed undoubtedly keep us from a good night’s sleep, which also promotes obesity. And, thanks to modern air conditioning, we don’t sweat or shiver nearly as much as we used to, which keeps us fat and happy. Does anyone want to tax air conditioners?

Smokers who quit smoking have been known to gain considerable weight, yet we continue to tax tobacco products heavily to discourage their use. Is getting sick from obesity, say diabetes or heart disease, preferable to getting lung cancer?

Discouraging the consumption of sugary soft drinks through taxation is obviously a political expedient for raising money for the president’s healthcare plan, and is hardly a credible starting point for fighting the ubiquitous, seemingly inexorable, yet theoretically preventable, obesity problem we face. If the Obama administration is serious about discouraging obesity-prone behavior through taxation, it should at least present a more consistent, if not comprehensive, approach by considering taxing some other behavior contributing to the global obesity pandemic.

But, not so fast! Before we go too far down that road (or on that slippery slope) we should consider whether mitigating obesity by taxing bad behavior is worth having the government micro-manage every aspect of our lives. For example, do you want our government to have the right to discourage our American idles from watching “American Idol”?

Obama’s Presidency -- a Gift or a Trojan Horse for America?

2009-05-20T13:18:00.002-04:00

At the president’s inauguration some members of the mainstream media fumbled to find words to capture the momentous occasion. Many compared the event to a coronation of royalty and went so far as to compare the inauguration to the Second Coming. Some commentators saw the new president as a divine gift sent to save America and the entire free world. That gift may turn out to be somewhat of a Trojan horse.

In his inaugural speech, the president extended himself to our enemies by saying "…that we will extend a hand if you are willing to unclench your fist." His statement was conciliatory and firm and we all hoped it would begin a peaceful dialogue with those who would do us harm. Our president may truly believe that he can talk our enemies out of killing us, and I give him credit for trying. Unfortunately, to buy into the president’s approach we must believe that we can rationalize with terrorists who think little of killing themselves, let alone us. We must also believe that our enemies hate us because they hate Republicans, former President Bush and/or America’s attitude and behavior toward the rest of the world in recent years. However, terrorists have been trying to kill us long before anyone ever heard of George W. Bush. Remember the botched attempt to blow up New York’s World Trade Center in 1993, during the Clinton administration?

My real concern is not that President Obama seeks to talk to our enemies but that he seems to be signaling his intent to dismantle certain elements of the national security infrastructure that arguably kept us safe since 9/11. Thankfully, the president now seems to appreciate the actions of his predecessor concerning national security and is moving cautiously in implementing changes. However, proposing cuts in national defense spending and eliminating enhanced interrogation techniques make me wonder if the president is taking national security just a little less seriously than he should. The president seems preoccupied with securing the civil rights of terrorists when his objective should be to keep us safe. While those two objectives are not always mutually exclusive, they do compete and giving weight to the former is likely to hinder proper execution of the latter at times. We need to know that our interests will come first next time we’re attacked.

It is impossible to prove that the methods and tactics employed by the Bush administration kept us safe, but it is at least heartening to know that none of the more than 11,000 terrorist attacks (and more than 14,000 deaths) that took place worldwide since 9/11 occurred on American soil. It is equally impossible to claim that the absence of terrorist activity in the U.S. under this new administration thus far proves the success of the president’s approach. In fact, contrary to Joe Biden’s assertion during the presidential campaign, it is plausible that our enemies will choose not to test our new president’s mettle early in his administration. Why should they? If they believe the new administration will relax national security measures, even slightly, going forward, they would be wise to bide their time for a few years, and attack us later when we least expect it.

Citi Field Is No Substitute for Shea Stadium

2009-05-15T12:36:00.003-04:00

My neighbor Jeff returned from his annual spring weekend in New York City with nothing good to say about Citi Field, the New York Mets’ new stadium. You need to understand the significance of his commentary. Jeff loves the Mets even more than the game of baseball and makes Seinfeld’s Mrs. Sokol look like a fair-weather fan. Mrs. Sokol may have watched every inning of every game played by the ’86 Mets, but Jeff has been a fan through thick and thin and has personally endured their agony and ecstasy over their 47-year history. If the new stadium didn’t impress him, who’s going to be impressed?

Jeff complained about the fact that the new stadium’s Jackie Robinson Rotunda pays tribute to New York’s National League roots, but pays no homage to the Amazing ’69 and ’86 Mets, Tom Terrific (Seaver) or any other stars of its story book past. Notwithstanding the venue’s physical superiority to Shea Stadium in so many technical ways, it falls short on a few features that matter most to fans. First, athough the seats themselves are two inches wider than the old ones, they number 15,000 fewer than in good ‘ol Shea. Second, while seats may be more spacious and provide more leg room, their relative comfort is debatable as their slight alignment toward home plate makes viewing the whole field more of a chore for even the most physically dexterous. Finally, the new venue has several blind spots obscuring the view of the action on the field from most seats, even apparently from those in the press box. For true fans that go to the ballgame to actually see the game, such tangible shortcomings cannot be compensated for with a larger team store, more luxury suites, and more restaurants. However, even Jeff would agree that all fans will benefit from more elevators and more toilets (per seat) that the new venue offers. Jeff shared his views with his friends attending the game with him, and given the reaction of fans seated around him listening to the conversation, Jeff’s sure many others share his disappointment.

How could that be? The new $900 million stadium was designed by HOK Sport, the internationally renowned architectural firm. HOK Sport has designed and renovated 13 of the 30 major league ballparks in use today and seven of the last eight to open in Major League Baseball. Shea Stadium cost less than $30 million to build and even though that was real money nearly 50 years ago, dramatic improvements in both technology and building materials since then should have guaranteed a physically superior stadium in every way. Also, thousands of people were involved for years with the planning and development of the new stadium. Didn’t any of them ever go to a ball game? The New York Mets will be paying the bulk of the tab for Citi Field until the cows come home in the form of principal and interest on the $850 million in municipal bonds issued to cover most of its construction cost. I hope at least they’re happy with their new home.

New Yorkers are among the world’s greatest baseball fans, but they are also among the least forgiving. I have little doubt that by the end of this inaugural season Citi Field will have many new nicknames. The most obvious will come from an unflattering mispronunciation of its first syllable from a “C” sound in "Citi" to “Sh.” Some may say the mispronunciation incorporates the memory of old “Shea,” but most will know that the deliberate mispronunciation more aptly captures the fan experience at the new stadium.

U.S. Supreme Court Needs Justices with Proven Capabilities and Integrity

2009-05-06T14:20:00.001-04:00

Senate Majority Leader Harry Reid was recently asked who he thought President Obama should select to replace retiring Supreme Court Justice David Souter. In his reply he indicated that the list should not be limited to candidates with experience as judges. Senator Reid also said he preferred someone from the real world and not someone who had spent most of their career among others who wore black robes. Many other democrats have indicated a preference for a candidate who will empathize with disenfranchised Americans and bring a sense of fairness and social justice to the position. Still others think that diversifying the bench by adding a woman, a Hispanic and/or perhaps even an Asian should be an important consideration. We know for sure the appointment will be political, as it always is, and given the president’s political leaning, the nominee is likely to come from the liberal camp.

All of those considerations notwithstanding, isn’t the job of the Supreme Court to interpret the Constitution of the United States? Shouldn’t a nominee’s proven ability to do that be the starting point for the selection process? I would have thought that a nominee with background as a judge would have a decided advantage for such a job. He didn’t say but I wonder if Mr. Reid would concede that all prospective nominees should at least be lawyers. If recent history has taught us anything it's that we really shouldn’t take anything for granted.

We elected an inexperienced president with an unproven track record. Taking our lead, our new president promptly nominated many individuals for his cabinet that lacked experience and gravitas for their respective positions. However, the nominees that failed their confirmation hearings did so not because of those professional deficiencies, but because they had legal, tax and other skeletons hanging in their closets that caused even the most unassuming among us to question their integrity. Before this year, would anyone have believed that a proven tax cheat would be in charge of the U.S. Treasury, the agency that oversees the IRS? Although unquestionably the most egregious example, it’s only one on a shamefully long list of questionable nominations. Why assume this time will be different? We elected a president who had been barely a senator. It’s certainly plausible that he could appoint a Supreme Court Justice who was barely a lawyer.

Harry Reid ended his interview on the topic saying that he thought that the President’s selection to the Supreme Court would be as good as the men and women he selected for his cabinet. That’s what worries me.

Exploding U.S. Debt May Haunt Us Forever.

2009-05-04T11:42:00.003-04:00

Sometimes I imagine our President many years in the future, sitting at a desk in the oval office early in the morning softly singing a particular refrain from the tune “Paradise by the Dashboard Light.” The President rewrites the words to secretly confess a pressing desire: “So now [we’re] praying for the end of time to hurry up and arrive cause if [we] gotta spend another [dollar on debt] I don’t think that [we] can really survive. I’ll never break [our] promise or forget [our] vow, but God only knows what [we] can do right now. [We’re] praying for the end of time, it’s all that [we] can do. Praying for the end of time, so [we] can end [our debt] with you!

The media pundits debate the outlook for our future if our spending continues out of control but the cold hard reality is that our Government’s debt has already grown to an unfathomable level. One source estimates that current and future obligations of the U.S. Government, including social security and medicare payments, exceed $65 trillion. That is 65 with twelve zeros after it! It’s also more than the entire world’s GDP and more than four times our own. The Congressional Budget Office (CBO) projects our national debt to rise $9.3 trillion in the next ten years under team Obama, and some have estimated that the average 20 year old today will pay $114,000 more federal taxes during his/her working life just to pay the interest on that incremental increase. Can you imagine the total interest that debt will produce? Can you imagine actually trying to pay back the principal?

I agree that worrying about budget deficits while the world faces economic Armageddon makes little sense. However, our critical need to spend, and spend big, at this time should be tempered with at least some acknowledgment that an 800-pound gorilla of a national debt threatens to crush our economy for at least many generations to come, if not bankrupt us once and for all.

Now may not be the time to attack this problem, but our leaders better make it a serious priority soon. Having the Obama administration cite its intention to cut our budget deficit in half in five years when it knows full well that during that same period our total debt will grow $4.6 trillion is, to say the least, disingenuous. Further, Obama announcing a measly $100 million budget cut when apparently many on both sides of the aisle in Congress agree that more than $300 billion of unworthy projects is just begging to be cut immediately is insulting to Americans and should embarrass our leaders.

No one is suggesting that the solution to our growing debt problem will come easy. Even world-renowned economist, John Maynard Keynes, could offer little solace back in the 1930s Great Depression when asked about the long-term effects of higher deficit spending. His glib answer then is the now famous quote: “In the long run we’re all dead.” That’s not much of an outlook for the future and it certainly isn't change we can believe in.

Will Chrysler’s Bankruptcy Uphold the Rule of Law?

2009-05-02T12:45:00.002-04:00

The President recently announced that despite the Government’s best effort to save Chrysler from bankruptcy, greedy bondholders are forcing a bankruptcy because they want a better deal. Once again, the President mischaracterized reality to suit his own political agenda. He claimed that certain bondholders refused to make sacrifices that other stakeholders did. He did not tell us that those bondholders were put off by the fact that the Government proposal offered them less than 30 cents on the dollar, some $2 billion in cash for their nearly $7 billion investment, with no equity stake in the new company. He also conveniently omitted that the autoworkers union (UAW) would receive half of the value owed it in stock of the new company and would become New Chrysler’s majority stakeholder. Does it really make sense to reward the guys (the union) who significantly contributed to Chrysler’s demise in the first place by giving them a huge stake in the new company? Isn’t it just a bit sneaky to completely ignore the fact that in bankruptcy bondholders would be among the first to be paid and probably walk away with substantially more than 30 cents on the dollar-value of their investment?

The major issue isn’t the obvious unfairness or idiocy of that proposal. It is about the Government using its discretion to change the way business is done America. Politics clearly played a key role in formulating the Government’s proposal to save Chrysler. The autoworkers union and others were a significant factor in electing President Obama and it is obvious that he was attempting to reward them for their support. It will be interesting to see if those politics play a part in structuring a deal in bankruptcy. If it does, the deal’s ramifications will extend well beyond its impact on the parties to the struggling automaker.

American business thrives because it relies on the rule of law and the sanctity of private property rights and private contracts. Throughout our history, through thick and thin, that system and its precedents have provided a framework of predictability, certainty and impartiality to the way business is done here. It has also been a major reason why foreigners and Americans alike would rather do business in America than anywhere else on the planet.

The world’s major governments were justified in intervening in private industry in an unprecedented manner during past two years in order to save our global financial system. However, they may have now overstayed their welcome. Either way, America will need to know how Government intends to proceed going forward. The Government has already become ensconced in our financial system and because of its demonstrated ad hoc and lacking management approach, there is a growing reluctance among private investors to collaborate with it to recapitalize the banks. Investors are quite rightly concerned that submitting to an investment program where our Government changes or makes up the rules as it goes along presents risks that outweigh even the most attractive of returns expected from the public-private partnership to purchase toxic assets from the banks. It is also clear that the Obama administration plans to replicate its onerous management format in order to play a major role in our energy industries and healthcare system going forward. You can bet those efforts will be met with a similar lack of enthusiasm, skepticism and confusion by the private sector.

The Obama administration may truly believe it is implementing change we can believe in, but it is rapidly becoming change Americans cannot invest in.

Did Obama’s First 100 Days Meet Your Expectations?

2009-04-28T15:01:00.001-04:00

It will be interesting to see how the media spins the president’s first 100 days in office, but will come as no surprise if Democrats are deemed to be more satisfied than Republicans with the “results” so far. Don’t be surprised if some Democrats are also deemed to be more disappointed than Republicans.

President Obama is presiding over the most emphatically liberal Democratic agenda in our nation’s modern history. He has taken steps to dramatically grow government and is proposing to spend money like it’s going out of style. He justifies his radical moves by claiming it’s the only way to undo the economic peril left by the previous administration. He has used that assessment to effectively exclude Republicans from important budgetary and other legislative matters so far. Democrats should be delighted, but are they getting what they bargained for from team Obama?

Most Democrats believed Obama was going to change the corrupt and special interests that have heretofore characterized national politics. They also expected him to rise above partisan politics for the greater good and involve people of integrity in his new and transparent administration. Instead, the president’s first 100 days has shown his willingness to set unilaterally (with his democratic and liberal congress) long term, financially irreversible and profound strategic directions for our nation. Transparency seems to have vanished as a general objective but has been used as a weapon for political expedience to embarrass his opposition, such as to punish the Bush administration for war crimes. His cabinet nominations have been drawn from the same pool of tainted politicians that his administration was supposed to eliminate. So much for cleaning up old-style Washington politics.

Furthermore, the fiscally-conservative Democrats and Independents that bought into the moderate, centrist persona that Obama conjured up to win the election are still recovering from the whiplash of him darting to the left soon after his inauguration.

Most Republicans saw that head fake coming and probably feel they got what they expected from an Obama presidency, even if they’re now horrified with how the nation is being managed. The good news for them is that so far Obama continues to be a talker and not a doer, and given his penchant for popularity he may change directions if the political tea leaves so dictate.

Obama’s inaction may also be bad news for the nation. If Obama doesn’t take definitive action soon to put us on a path to economic prosperity, our American goose may be cooked. We’ve gotten plenty of lip service about change, but only after the details are worked out and actually implemented will we know if it’s change for its own sake or change we can believe in.

Is Iran's Ahmadinejad for Real?

2009-04-17T10:38:00.003-04:00

I was transfixed and hopeful when I heard the news yesterday that Iran's President Mahmoud Ahmadinejad was preparing a proposal to begin "a fresh start with the West." Apparently, however, the forthcoming proposal may not adequately address Iran's uranium enrichment program. That quickly turned my hope to solid skepticism. I was heartened to learn that the U.S., the European Union, China and Russia had already rejected Iran's proposal probably because of that glaring omission. It's obvious that Iran has everything to gain and the West (most probably) has everything to lose with the proposal as it stands now and I was glad that at least the major world powers rejected it unanimously and emphatically. Isn't this the guy who vowed to wipe Israel off the face of the Earth and take the U.S. with it? Isn't Iran working tenaciously to develop nuclear weapons in order to accomplish that mission? The U.S. and the West have been desperately trying to keep Iran from getting those weapons. There can be no "fresh start" without first addressing and reconciling those opposing points of view.

It appears that Ahmadinejad has at least three reasons for wanting to chat it up with us and the rest of the West, without conditions of course. First, he is apparently fighting for his political life in the upcoming June national presidential election. The polls apparently indicate that his opponent, Mr. Mousavi, is cleaning his clock, so Ahmadinejad could think that making nice with the U.S. and the rest of the West might win him some support at home. Second, the West can't very well continue its effort to stop Iran from building nukes if it is "negotiating in good faith" with Iran. Third, and for the same reason, it is unlikely that Israel will take military action against Iran, which it vowed to do because of Iran's horrific threat against it, while its best ally, the U.S., and Iran are engaged in discussions to begin anew and bury the hatchet.

The bottom line is that if Iran wants to forge a new and more moderate relationship with the West, it must know that it must first knock off the nuke activity. Claiming that Iran's interest in nukes is for electricity generation is insulting. And, insulting the intelligence of those you're supposedly trying to make nice with is hardly the way to bring about a new beginning. It will be interesting to see just how serious Ahmadinejad is about reaching out to the West in the weeks ahead, especially as Iran's June election nears.

Obama's New Economy May Be a House of Cards

2009-04-14T14:44:00.011-04:00

There was nothing new in the President's speech yesterday. The first half blamed the Bush administration for our current economic woes and the second half consisted of general highlights of his broad economic agenda.

The President intends to set the nation on a firm foundation for long term growth and prosperity by implementing an agenda that he’s outlined ad nauseum every week since his inauguration, but now summarized succinctly with five points:

1. Regulate Wall Street;
2. Improve education;
3. Champion the use of alternative renewable energy;
4. Reform our health care system; and
5. Reign-in and ultimately reduce the exploding Government deficit.

Everyone knows that cultivating renewable energy and health care reform are in our nation's long term best interest, but everyone also knows that these profound changes will not come cheap or without some sacrifices. And that's the problem. We still don't know any more about the specifics of his plan than we did when Mr. Obama was a candidate for President. We do know that the last two points are at odds with one another and that points one and three could severely stymie our economic recovery. Expanding Government's role in our health care system while trying to reduce the Government deficit would be as futile as putting one's finger in a dam to hold back a raging flood.

It's not obvious that more Government regulation of our financial system would be beneficial either, considering the Government's demonstrated incompetence in managing Citigroup and AIG and other financial institutions during the past couple of years. Imagine the damage it could do with permanent authority to micro-manage our entire financial system. Also, a carbon tax on oil is expected as part of the President's plan to encourage the use of alternative renewable energy sources. That will effectively increase taxes significantly for everyone and stall our economic recovery.

The President's convenient use of "straw men" to undermine and downplay substantive and serious criticism also reduces confidence in his agenda. In his speech, for example, he said his critics want to reduce Government spending, when in fact they advised against his proposed dramatic increases. The President also said he inherited a large Government deficit, which is true, but does that justify proposing to double and triple that deficit during the next five and ten years, respectively?

The President's credibility is also called into question when he shades or tells half-truths. He says that greed and lack of regulation on Wall Street got us into this financial firestorm, but conveniently overlooks the fact that the Clinton administration ignited the fire, when in the late 1990s it created the boom in subprime lending and risky mortgage-backed securities in order to push its agenda to enable more Americans to buy homes. Also, the President's claim that Government spending must increase to spur economic recovery is not supported by empirical evidence. Most economists, including his own advisors, know that fiscal stimulus, especially government spending, has never been particularly effective in shortening recessions or precipitating economic recovery.

Mr. President, it's time to put all your cards on the table and tell us in detail what you really have in mind. You should also tell us the inconvenient truths along with the benefits of your plan. We don't need to be "sold," we need to be persuaded by facts and reason.

New World Order Must Require G-20 Nations to Pay to Play

2009-04-05T14:49:00.004-04:00

At the G-20 meeting last week, President Obama apologized for America's "failure to appreciate Europe's leading role in the world." I didn't know Europe had a leading role in the world. Besides, what more could or should the U.S do to show its appreciation? The U.S. and shamefully few allies have defended Europe's as well as the rest of the world's freedom since World War II. They have also intervened to quell skirmishes, encroachments, conflicts, attacks and other acts of international aggression faithfully many times over the past 60 years. U.S. military spending exceeds one trillion dollars a year, which amounts to more than half the world's total military spending. That saves the rest of the world more than one trillion dollars every year to spend at its discretion. All America receives in return is criticism for its motives and its methods for keeping the world safe. The U.S. also spends by far more than any other nation on earth for global humanitarian endeavors for which it receives criticism for not contributing a greater percentage of its gross domestic product. Who should be apologizing to whom?

Europeans cheered the President's denigrating remarks about our nation, but the U.S. received little in return for its confession and apology. The G-20 rejected the President's plea to them to use stimulative spending to support their own economic growth. At least they agreed to spend $1.1 Trillion assisting the global financial system. France and Germany agreed to "fully support the U.S. strategy in Afghanistan" but fell short of committing troops to support our own. They will, however, provide personnel for training and development. Americans have become so riddled with guilt about its bad behavior around the world that we are conditioned to feel grateful when other nations cooperate with us, even when they contribute to their own cause!

Going forward, it will be interesting to see if the new spirit of cooperation garners any G-20 support for our security efforts with regard to Afghanistan, Iran, North Korea and any other problem areas that threaten the security of the entire free world. Why should they? They know the U.S. is prepared to get the job done without their assistance. They can wash their hands, literally and figuratively, of all the dirty work and sleep soundly knowing they retain the option to criticize the U.S. if public opinion turns against the actions it chooses to take. Many nations revel in their envious positions of being both beneficiary and critic of U.S. efforts to keep them safe.

The G-20 is now discussing the concept of a transnational agency that would oversee and regulate the global financial system, promote free trade, and oversee other matters of an international economic nature. For it to work effectively it will require the U.S. and other G-20 nations to relinquish their sovereign control over significant aspects of their economies and financial institutions. If it proceeds, some global bureaucratic regulatory authority effectively accountable to no one in America would be empowered to make decisions with far-reaching impact on our economic well being. It's a bad idea and anyone willing to trade our Government "by and for the people" for such an arrangement should seriously rethink their position. Clearly, the U.S. has more to lose and less to gain than all the other parties to such a plan. Luckily, I don't see it happening any time soon.

Without sovereignty or "teeth" to enforce its policies, a transnational regulatory agency is likely to be a feckless waste of time and bureaucracy. The European Union and United Nations are living examples of transnational entities without sovereignty, and both are impotent and ineffectual to the point that many question their continued viability and existence.

Regardless of the outcome of the creation of a transnational regulatory agency, the President's effort to elicit the trust and cooperation of our global community makes sense and should be applauded. The world would be better off if the U.S. remains its leader. However, in a New World order with the U.S. sharing the status of just one nation among many, I would hope that it would share its resource burdens accordingly. Going forward every member nation wanting to "play" should have to "pay" for the privilege, because partnerships work best when all partners have a meaningful stake invested in their success. The U.S. must insist that participating nations ante up money and manpower, commensurate with their capabilities, to insure their tangible stake in and ongoing commitment to the global collaborative effort.

Stock Market Crash 2008-9: Lessons for Investors (Part 2 of 2)

2009-04-04T16:38:00.002-04:00

Part 2 highlights lessons specific to managing your money in these uncertain and turbulent times:

LEVERAGE CAN BE A DREAM COME TRUE IN UP MARKETS AND YOUR BIGGEST NIGHTMARE ON THE WAY DOWN. Cheap and plentiful debt reinvigorated the market after the fallout following 9-11 and ultimately propelled the market to new heights in a few short years. That debt also led to a housing bubble that burst in 2007 and single-handedly nearly brought down our entire global financial system. At its peak, global debt levels exceeded global GDP by nearly a 4-to-1 ratio. Experts believe that the global debt ratio will need to be cut in half or more before the massive de-levering of the global economy occurring now comes to an end. The process will be painful and is expected to last for several years. At a micro level, investors need to consider debt/equity ratios in their investments and understand that higher expected returns are often the result of higher debt/equity ratios. Those investments are inherently riskier and ultimately vulnerable to being lost during severe market downturns.

FINANCIAL MEDIA AND TV PUNDITS CAN OFFER VALUABLE MARKET INSIGHTS, BUT RARELY PROVIDE WORTHWHILE INVESTMENT ADVICE.. Mark Twain once quipped that "if you don’t read the newspaper you’re uninformed; if you do you’re misinformed." For the past two years, the mainstream financial media seemed as numb as the rest of us to market realities, as their reports vacillated between optimistic and pessimistic market forecasts. Look to the media to gain important insights about the mechanics of how the market works or to provide a historical context for market events, but resist acting on media advice when managing your portfolios.

YOU MUST PLAY A MEANINGFUL ROLE IN MANAGING YOUR MONEY. Recent financial scandals, such as Bernard Madoff’s $65 Billion Ponzi scheme, make it clear that you can not be too careful in managing your money, even when employing long-standing reputable professionals. So, even if you trust and respect the expertise of your broker/financial advisor/investment manager, remember that you are uniquely qualified and motivated to watch out for your own interests.

YOU SHOULD INVEST IN SMALL INCREMENTS, SLOWLY OVER TIME. Dollar-cost-averaging is one popular technique for implementing such a discipline, and directs investors to periodically commit (e.g., monthly, quarterly) a fixed amount of money to their investment portfolios. Doing so will guarantee that you buy more investment shares in down markets than up markets, which can make a real difference in your investment returns in these volatile markets.

DON’T BE GREEDY; TAKE PROFITS AS THEY BECOME AVAILABLE. No one ever went broke taking a profit, and the mirror image of investing slowly is to take some profits periodically as they arise. In rising markets you may feel foolish cashing out of investments as they appreciate, but when the bottom drops out of the market, suddenly and unexpectedly, you’ll feel vindicated and relieved that you conscientiously took some of those profits.
ALWAYS KEEP SOME CASH ON HAND FOR UNEXPECTED BUYING OPPORTUNITIES. Extreme market volatility is unsettling, but volatility creates significant buying opportunities when you least expect them. You need to be ready. As you trade in and out of your investments, you should hold at least 5-10% of your portfolio in cash at all times.

STRIVE TO MINIMIZE INVESTMENT COSTS. This may be the most important lesson highlighted herein, and the one most likely to yield tangible results. The investment environment for many years to come promises to be fraught with many serious challenges, such as high inflation and high interest rates, which will make attractive investment returns more difficult than ever to achieve. You can’t control market movements but you can control many of your investment costs, and reducing them may be easier than you think. For example, stock index funds that deliver the same returns often vary materially in the annual fees/costs they charge investors. Sometimes cost disparities may be as much as 50-100 basis points (or 0.5-1.00%) and those seemingly small cost differences can add up to substantial cost savings over long time periods. A 50 basis point saving on a $10,000 investment in a stock index fund that grows at 8% per year can produce a total cost saving of nearly $800 over ten years. In addition, you should avoid "load" mutual funds that charge an up-front fee, or at least have a compelling reason to choose one when you do. Some funds can be complicated, especially funds wrapped in annuities, and don’t always clearly delineate the various of fees and costs inherent in such products.

Managing your money has never been more difficult than it is today. These lessons are intended to provide some discipline for managing your money effectively during the challenging times ahead.

U.S. Auto Industry Can Be Saved Only By Bankruptcy

2009-03-31T11:14:00.005-04:00

What do you do with a business with an artificially bloated cost-structure that sells a product that has steadily lost consumer favor for decades? And refuses to take the necessary steps to turn itself around? There are two choices: let it fail or save it, and each involves bankruptcy. Chrysler is headed for Chapter 7 Bankruptcy and will probably be liquidated if it can’t strike a deal soon to partner with Italy’s Fiat SpA. General Motors’ (GM) will probably pursue some kind of government-sponsored reorganization, which is a euphemism for Chapter 11 Bankruptcy. The Ford Company, the other member of the Detroit Three (Stooges?), appears to be surviving on its own without the need for Government subsidy, at least for now.

The automakers are understandably in denial and doing their best to delay the inevitable. President Obama is understandably reluctant to force severe terms on the auto workers union (UAW) that got him elected. However, the Obama Administration rejected both GM’s and Chrysler’s latest reorganization plans and indicated it will not continue to subsidize the auto companies in their current form. It also says preservation of a U.S. auto industry is important to our economic and national security. Consequently, it is clear that the substantial reforms needed are not likely to occur without the assistance of a formal bankruptcy.

So, why don’t they just get on with it? Instead, the Obama Administration is further delaying the inevitable and announced on March 30th that it is giving GM 60 more days to present yet another reorganization plan and Chrysler 30 more days to reach an agreement to partner with Fiat or another automaker. Besides the agonizing and futile time extension, this supposedly last extension is likely to cost U.S. taxpayers another $16.6 billion for GM and $5 billion for Chrysler on top of the $17.4 billion they collectively received last December. Will the Administration pull the trigger and force terms for a viable reorganization on GM and the UAW and let Chrysler fail, if those companies don’t successfully execute their respective dispositions by deadline? If the Administration is serious about getting this done, shouldn’t it have called for the resignation of UAW’s President, Ron Gettelfinger, when it forced GM’s CEO Rick Wagoner to resign?

Senator Bob Corker’s reorganization plan presented last December is most likely to be the template for the inevitable course of action that will occur once the decision-makers reach the conclusion most of us already, if reluctantly, accept. The Corker Plan proposed letting Chrysler go into liquidation and a reorganization of GM according to terms that a bankruptcy proceeding might require. According to Corker’s analysis: GM bondholders would need to accept 30 cents on the dollar to help reduce GM’s $27 billion debt load; worker wages should be reduced to be consistent with foreign competitors operating here; and payments to workers receiving almost full compensation up to four years after termination would need to be eliminated. It should be noted that rank-and-file employees under UAW contracts earn $70-74/hour including benefits, while competing foreign companies operating in the U.S. earn $42-44/hour. In addition, half of the $24 billion GM owes to the UAW’s health care account for retirees would need to be paid in GM stock.

With the passage of time and the further deterioration in the auto business generally, it is likely that the terms of the ultimate reorganization plan will be even more draconian than those proposed by Senator Corker. This problem isn’t going to resolve itself. So the question is: When will the Obama Administration do what is necessary to save the U.S. auto industry?

Stock Market Crash 2008-9: Lessons for Investors (Part 1 of 2)

2009-03-29T10:51:00.008-04:00

The value of global financial assets shrank $50 Trillion during the past two years, half due to the bronco-busting ride in the stock market. Those still standing or with the courage to consider getting back on that horse (or should I say bear?) might consider some of the lessons learned from the harrowing experience:

WE LIVE IN A GLOBAL ECONOMY WITH A GLOBAL STOCK MARKET. The U.S. is still the primary growth engine of the global economy. However, the European Union is today the world’s largest single economy and the BRIC economies (Brazil, Russia, India, China) along with other emerging markets will most likely drive global economic growth for the next several generations. Ten years ago the U.S. comprised half of the world’s stock market capitalization, but today its share represents about a quarter of the global stock market. U.S. investors will need to consider the risks and opportunities that will come from being inextricably connected to that global marketplace.

DIVERSIFICATION IS STILL THE ONLY "FREE LUNCH" IN INVESTING. Many believe that the recent downturn in all stock categories means that diversification does not work. However, diversification only promises to reduce portfolio risk by mitigating the specific risks attendant to individual investments; it never promises to insulate investors from overall market risk, which is exactly what we’ve experienced during the past two years. Diversification is still an important risk mitigation tool that arises from combining several asset categories (stocks, bonds, etc) or combining variety within a particular asset category, such as stocks. In fact, many experts believe that, for maximizing risk-adjusted returns, a portfolio mix of many types of assets is even more important than the mix of stocks in a portfolio. Therefore, first consideration should be given to allocating resources to stocks, bonds, gold, cash, etc. The stock allocation should be a secondary consideration. Within the stock category, investors traditionally seek to diversify according to industry sectors, geography, investment style (e.g., growth versus value) or market capitalization (e.g., nano, micro, small, medium, large, mega-cap) in order to minimize specific investment risks over the long term.

STOCKS SHOULD BE CONSIDERED LONG TERM INVESTMENTS. The dramatic increase in stock market volatility in recent years has created a professional trader’s paradise, but has also created a treacherous environment for other investors. Consequently, investors should have a long-term horizon of at least 5 years and preferably 7-10 years for their stock portfolios. Long time horizons provide flexibility to recover from protracted and dramatic market setbacks. Strict “buy-and-hold” strategies for individual stocks are not recommended, but needing to sell out of stock positions on short notice to raise cash for other purposes will not produce satisfactory investment results. Stocks may be “liquid” investments, but “fire” sales at steeply discounted prices provide little consolation to sellers.

INVESTING IN "BLUE CHIP" COMPANIES NO LONGER GUARANTEES INVESTMENT SUCCESS. During the last year, several venerable long-standing institutions disappeared or were saved from extinction by heroic government bailouts. AIG, Citigroup, Lehman, Fannie and Freddie and many other household names are on that list. An examination of the 30 stocks comprising the Dow-Jones Industrial Average shows that even major non-financial companies dramatically fell in value, some below $10 per share, during the past year. The past two years has proven that the idea of buying stock in today’s great companies and blindly holding them forever is a thing of the past.

Part 2 will highlight lessons specific to managing your money in these uncertain and turbulent times.

How Much Are Your Social Security and Pension Benefits Worth?

2009-03-19T11:57:00.006-04:00

As investors watch their investment portfolios dramatically shrink, they have come to realize that their social security and other pensions have become a more significant part of their financial security in retirement. But how do you compare monthly life-long payments with other lump sum asset totals shown on your financial statements? It is helpful to estimate the upfront, lump sum value of that life-long stream of monthly benefits. That estimate will answer the question: How much money would you need today in a lump sum to generate that same monthly social security or pension benefit for the rest of your life?

First, you need to make some assumptions: What is your monthly social security or pension benefit? What is your life expectancy? Those two assumptions indicate how much and how long your lump sum must provide benefits. What interest rate should you assume that lump sum earns while it's rendering those monthly payments? Finally, and for the sake of simplicity, let’s assume that the benefits end with your death. A simple example illustrates these assumptions in action. Let’s say your monthly benefit is $1,000 and you expect to live another 25 years. Generally, you would select as your interest rate a long-term treasury rate equal to or greater than your life expectancy, because you would want to invest your lump sum to insure the safety of principal and interest for the rest of your life. In this example, you might select a 30-year treasury rate, which currently yields nearly 4%.

Armed with your assumptions, there are two easy methods for performing the actual calculation. The first method is to use a sophisticated hand calculator that has financial function keys and do the same calculations you would do if you were calculating mortgage payments. With mortgage calculations, you typically enter the mortgage balance, mortgage rate and mortgage term and solve for the monthly mortgage payment. In order to calculate the lump sum value of your social security benefits, you enter the interest rate (instead of a mortgage rate) and your life expectancy (instead of the mortgage term). You then enter your monthly benefit (using the mortgage payment key) and solve for the lump sum amount (obtained from the mortgage balance key). With a typical mortgage calculation, you enter the mortgage balance and solve for the monthly mortgage payment. With the lump sum calculation, you enter the monthly benefit and solve for the lump sum balance. Don’t forget to use monthly interest rates and express your life expectancy in months, if you use monthly benefits in your calculation. Otherwise, use annual interest rates, your life expectancy expressed in years and your annual benefits in the calculation.

The second method is to use a present value ordinary annuity table and find the annuity factor that corresponds to your interest rate and life expectancy assumptions. In our example, we assume a 4% rate and a 25-year life expectancy, which according to the table, indicates an annuity factor of 15.6. Multiplying your annual benefit of $12,000 by that 15.6 factor, the estimate of the lump sum value of social security benefits in this example is $187,200. Either method works, so you decide which to use.

Lump sum value estimates can be useful in your investment allocation planning process as they allow you to translate guaranteed monthly income streams into upfront totals that can then be easily compared to the amounts of other assets in your portfolio. They also offer additional insight into the potential net worth of your investment holdings. However, you should realize that those values are intangible, analytic in nature and exist only on paper, i.e., you can't cash them in at a bank. They are also likely to change as interest rates, your life expectancy, and social security benefits inevitably change during your lifetime. Due to their tentative nature and potential volatility, such estimates may be useful in formulating a long-term strategy for your finances, but less useful in making specific, tactical investment decisions.

Government Deficit Spending Means More Taxes, High Inflation and a Weak Dollar

2009-03-16T12:37:00.002-04:00

Everyone knows that Government spending today will mean higher taxes tomorrow. Far fewer realize that the huge budget deficits being created now will almost certainly bring us high inflation, even hyperinflation, and a significantly devalued dollar. This year the Government will need to borrow at least $2 Trillion, and if the Obama Administration has its way, trillions more will be needed during the next several years. However, regardless of Mr. Obama’s appetite for spending, the magnitude of U.S. public debt and its size as a percentage of our gross domestic output are projected to grow at astounding rates during the next several decades.

How will we pay it all back? Historically, the Government raised money by issuing debt that Americans and foreigners alike eagerly held as investments. Currently, Americans, including our Government, and foreigners each own half of our public debt. According to a recent report by Fox News, China alone owns a quarter of our debt and is seen as the most likely buyer going forward, given its rapidly expanding appetite for our debt in recent years. But China too has its own economic problems and is getting serious reservations about increasing its exposure going forward. The other method of repaying debt is to raise taxes, but doing so in any meaningful way during this recession would be ill-advised. So where will the money come from?

The Government will likely have no choice but to print the extraordinary amount of money it needs, which will be highly- if not hyper- inflationary. (There is no agreement on a definition of hyperinflation but suffice it to say that if you quote monthly, rather than annual, inflation rates you’re probably there.) Checking inflation won't be easy either. Normally, during periods of high inflation, especially inflation induced by expansionary monetary policy, the Government raises interest rates to choke off inflation. But this time its hands would be tied by a seriously debt overburdened American public that would suffocate from the proportionately greater impact that higher interest rates would have on its household finances; finances dominated by high levels of mortgage, auto and consumer credit. Consequently, the Government is unlikely to curb our prospective high inflation by potentially pushing our economy into another Great Depression.

Needless to say, deficit-spending-induced high inflation will devastate our currency. The likely combination of high inflation and a weak dollar will further diminish the purchasing power of all Americans, especially retirees living on fixed incomes. Many economists believe that a good proxy for an economy’s stability and strength is the stability and strength of its currency, so a weak and unstable dollar will likely tarnish America’s star status in the world economy. America will also be seen as a riskier place to invest and cause many investors to flee our capital markets; effects that will further raise our interest rates and weaken our dollar.

I am hopeful none of this will happen, but many believe it will, at least to some degree, if we don’t change our spending habits. Given the risk of this scenario playing out, it would not be surprising to see investors favor inflation-hedges such as gold and other commodities and U.S. companies with significant exports abroad. Investors will also shy away from dollar-denominated investments by generally diversifying globally. The implications for our policy makers should be crystal clear: be extremely careful when spending our money, especially money we don’t have and need to borrow.

Mr. President, Our Economy Needs Focused, Hands-0n, Non-Partisan Leadership

2009-03-11T11:11:00.000-04:00

Dear Mr. President:

You must feel the weight of the entire free world on your shoulders, and I do not envy or minimize the difficulty of the mission you have before you. Notwithstanding the heroic efforts by you and your administration thus far, and with all due respect to you and your office, it seems painfully obvious that a timely and robust economic recovery will require more focused, hands-on and non-partisan leadership from you.

First, your administration should set a priority to solving our most immediate problems in the critical path of recovery before undertaking any long range economic planning. The banking crisis should have your complete and undivided attention, and is at the root of housing foreclosures, unemployment and our broader recession. Amending mark-to-market accounting rules and reinstating stock uptick rules would be a good place to start and doing so could realistically strengthen and stabilize the financial system. Current mark-to-market rules distort true market value and provide an unrealistic value assessment of bank assets. Re-instated uptick rules will thwart the senseless, relentless short selling that serves no useful purpose but to panic investors and drive otherwise viable companies out of business. Amending both rules should not be viewed as expedient solutions to our banking problem, as they make long run sense for improving our financial system.

You want to capitalize on your popularity by pushing through your entire long-term agenda right now. It seems obvious to me that energy independence, healthcare reform, and education reform cannot take place unless and until we fix banking, housing and the general economy. Also, your “drink from a fire hose” approach has been received as somewhat reckless and appears that you’ve bitten off more than you can chew. It’s difficult for us to swallow too. Also, you must be aware that if you are successful in solving our global banking problem, you will become an international hero and perhaps the most popular political leader in modern history. With such an achievement, your broader agenda would likely pass during your likely second term in office.

Second, America needs you to personally steer us through this mess. Save your energy and forego the unnecessary travel and superficial speaking engagements. You need to demonstrate that you have your hands around our nation’s critical issues and need to speak specifically and convincingly about their resolution. Delegating authority to Congress to draft and expediently pass trillion dollar legislation that could profoundly and irrevocably change our lives does not instill a lot of confidence that you are in charge of the process or fully appreciate its importance.

Third, you should resist implementing politically expedient policies that will likely hinder the rescue our economy. Dispense with the politics-as-usual you promised during your campaign. Your trusted advisors can tell you that massive and wasteful government spending, especially for gratuitous earmark projects, is an ineffective method of reversing an economic recession. Raising taxes on small business, the investments of the rich, and on energy (from a cap and trade policy) won’t help either. Use the tremendous political capital you possess to do what you know is right and told us you would do in your campaign. You’re a popular President in the “honeymoon” period of your administration. A more judicious approach to spending and a truly fiscally responsible posture would go a long way toward rebuilding confidence in our government and our economy.

Widespread confidence in you and your policies will be required to restore America’s prosperity.

The Truth About Luxury Apartment Living In South Florida

2009-03-09T11:25:00.002-04:00

Like many of my generation, I left fast pace, aggressive city living for a kinder, gentler lifestyle in South Florida. I sought temporary living accommodations, because I was sure that my housing wants and needs would become more apparent and defined once I settled into the tropical lifestyle, assuming they didn’t change altogether. So, I set out to rent an apartment from among South Florida’s abundant supply of luxury apartment communities.

Once I had made my decision to move I was eager to find a place to live and allotted myself a week in which to accomplish the task. Before leaving for Florida, I started my groundwork and searched online using a variety of websites that cater to the needs of people relocating and seeking housing in Florida. After I arrived in Florida, I picked up a couple of free paperback guides at the local supermarket, which proved more useful than I ever would have imagined. Finding a new home was going to be a snap, I thought.

IF YOU DON’T KNOW WHAT YOU WANT, YOU WON’T FIND IT HERE.I quickly learned that sometimes too many options can be (almost) as frustrating as too few, and came down with an acute case of “analysis paralysis” trying to sift through the dozens of possibilities I had before me. Initially, all I really knew was that I needed a place to live and that I wanted it to be somewhere on Florida’s Gold Coast, that vast region stretching from West Palm Beach south to the Florida Keys. With the Atlantic Ocean bordering the region to the east and the everglades to the west, I felt fortunate that my region of interest was fairly narrow, even if it had been longer than I would have preferred.

My next move was to buy a map of the region and select some criteria to focus my search and further limit my search area. Some considerations were more obvious than others were. For example, I knew I’d need a job and that, in my field, the prospects for finding one would dramatically increase with my proximity to the larger, denser urban areas of Ft. Lauderdale and Miami. However, I also knew that, with my luck, it was more than a possibility I’d land a job in less likely West Palm Beach and probably the day after the ink dried on my apartment lease in a community in the midst of one of those more prominent cities. I decided to hedge my bet and search within the nondescript area of Southern Palm Beach County-Northern Broward County, somewhat equidistant in space and time between the polar extremes of West Palm Beach and Miami.

In an attempt to further minimize my potential commutation time, I figured it might be a good idea to find a place near the region’s two major north-south highways, I-95 and the Florida Turnpike. Seeing still too many options on my list, I knew that further limiting myself to moderately priced communities would be sure to eliminate both the high end and more affordable extremes. I soon discovered that seeking moderate pricing would also narrow the geographic scope of my search, as I would now be looking too cheap to be near the Atlantic Ocean, but expensive enough to avoid sleeping with the gators in the glades.

Although I had done my best to winnow my list, I still had too many communities to evaluate in detail within the week’s deadline I had set for myself. I also knew that the kind of evaluation I needed to do would require more than a seat-of-the-pants review of the various apartment websites and paperback guides that I had at my disposal. It was time to get out in the field and kick a little dirt and wrestle with some bricks and mortar.

YOU CAN’T GET THERE FROM HERE. How hard could that be? I wondered. I had limited myself to a mere twenty-mile radius centered somewhere on Military Trail, between Boca Raton and Delray Beach, and I already possessed the complete addresses for all the communities I intended to visit. All I had to do was plan a logistically sensible itinerary, hop in my car and go take a look. As I started to plot each day’s itinerary on my map, I realized that having an address offered little insight into a destination’s location. After all, this was laid back Florida where residents come and go at a leisurely pace and show little concern about how long it takes to find their destination. Sure, South Florida has addresses, but no one abides by them, not even the mailmen. Around these parts, if you want to know where to go, you ask someone for directions, and get accustomed to hearing them in terms of mileage, number of traffic lights, or counting local landmarks like Winn-Dixies or Mobil-Exxon stations.

I learned quickly that most street addresses are useless, especially those on streets that don’t extend more that a couple of miles, or those on streets that change their names occasionally along the route. Adding to the confusion is the fact that every other town seems to have a road, street, avenue, or boulevard named “Atlantic” or “Ocean,” or has street numbers and directional designations that from the perspective of passersby seem to emanate from some fictitious place. Streets that don’t calibrate evenly like, for example, NE (Northeast) 47th street, followed immediately by NE 52nd street, and then NE 89th street are bad enough. But, when they intersect, say, SW (Southwest) 11th avenue, you start to wonder if you’ve found a new wrinkle in our universe’s space-time continuum.

Many apartment communities just make matters worse by concocting their own “exclusive” street addresses specially designed to give their locations cache, even if they lack a spatial context. In reality, the addresses exist only on their own community site maps and usually relate to nothing more than a long driveway extending from public access roads to their front gates.

LOTS OF DATA, BUT NOT ENOUGH INFORMATION. Street address numbers are among the most heavily guarded secrets in Florida. Many places don’t even bother to display them or display them so poorly that even a pair of eagle eyes and x-ray vision can’t spot them modestly displayed behind palm trees, store signs, shopping center marquees and the like. Besides, in my experience, following address numbers are more likely to hinder than help. Sometimes they lull you into a false sense of security as you observe them ascending or descending toward your destination only to find them jump ahead or completely reverse direction when you pass from one town to the next.

After these revelations, I knew that nothing short of some serious old-fashioned dead reckoning was going to be required in order to find my way. That meant picking up a phone, calling leasing offices, and asking for specific driving directions to their apartment communities. In some cases, I literally had to simulate in my mind taking the actual trip by visualizing all its landmarks before ever leaving my driveway. Gone were the days when travel directions were a matter of pinpointing a major intersection near a destination on a map and then leaving the rest up to an organized grid of roads to get there.

As I approached the entrance of the first community on my list, I couldn’t help feeling the sense of accomplishment I imagined Magellan had felt after circumnavigating the globe, albeit on a much, much smaller scale. However, I realized my celebration was pre-mature as I sat in my car outside the property’s heavy metal gates trying to guess the magic words that would get me inside. I followed the instructions posted on the gates’ sophisticated telephone directory system, but was denied access just the same. I ultimately ended up sneaking in behind a resident entering with an electronic key card. I learned during subsequent visits to these so-called secured, gated communities that sneaking in was part of the normal routine, which explains why none of the representatives I met at the various leasing offices I visited ever wondered how I got in without their assistance.

GOOD LEASING FOLKS CAN EASE THE PROCESS. I’m pleased to say that most of the leasing representatives I met at the more than two- dozen communities I visited that week were highly professional and efficient in discharging their obligation to enlighten me about their apartments. The really good ones cut to the chase and sized-up their offerings quickly. Many answered questions before I had asked them and usually with a few well chosen words and the aid of brochures, fact sheets and apartment floor plans and site maps. I was particularly glad when some representatives dispensed with filling out all the pre-application paperwork until after showing me their available units. As far as I was concerned, it was a complete waste of time for both of us unless and until I decided I wanted to live there.

DON’T BE FOOLED BY SMOKE AND MIRRORS. The fun part of the process was actually making inspections of the apartments. It was also the time I felt the need to start paying close attention to what I was doing. Some apartment communities will only show you model apartments they reserve specifically for that purpose, which are designed to help prospective tenants visualize living there. Needless to say, virtually all the models I saw looked brand new, tastefully furnished, and in much better condition than the apartments actually available to rent. And, except for giving a sense of the layout of a floor plan (and some communities have many) and how furniture might be arranged, models give little insight into the finish quality of the apartments actually available to new tenants. They also offer no sense of your neighbors or any other features that relate to the ambience of your apartment, such as its views or its exposure to light, air, and noise.

PRETEND YOU LIVE THERE. I learned quickly that the easiest way to become enthusiastic about or eliminate an apartment was to examine its layout, especially paying particular attention to room configurations, connecting walls and sight lines. If, for example, while standing at the front door, I was able to see all the bedroom and bathroom doors, I knew immediately I was ready to move on to the next apartment and hopefully one that would give the appearance (if not the reality) of more privacy. If layouts flowed logically with, say, kitchens situated near dining areas but separated from other living areas, I was satisfied and moved on to examining the rooms themselves.

During my inspections, I came to appreciate that room quality was not only a matter of size, but also shape and wall space considerations. Large rooms are great, but those with imaginative polygon shapes create odd angled corners that are difficult to utilize. In the same way, wall surfaces that are too encumbered with closets, windows and doors could make even rudimentary furniture placement a frustrating exercise.

The number and placement of doors and how well they separate living spaces was another consideration. For example, some master bathrooms have toilet closets, but no doors separating the shower/bath tub from bedrooms, which won’t suffice if you’re claustrophobic or finicky about not wanting shower humidity spreading throughout your home. Kitchens without doors can be troublesome too, unless adequate care has been taken to prevent cooking odors from wafting throughout the home.

While examining rooms, I took particular note of the number and spacing of electric outlets, and telephone and cable jacks available throughout an apartment. It came as no surprise that older properties do not usually cater well to today’s space-age electrical, entertainment and telecommunications requirements.

SOME PRISONS HAVE MORE WINDOWS. Windows were by far the biggest disappointment I encountered in all apartments across the board. Generally, there aren’t enough of them, they’re small and rarely found in kitchens or bathrooms. To make matters worse, most (if not all) tended to be on one side of apartments. It amazes me that in a place like Florida with all its sunshine, clean air and pleasant climate (at least 6 months a year), more care isn’t taken by architects and builders to optimize the use of windows in residential structures. Suffice it to say that fresh air cross ventilation is hard to come by in Florida, so get used to working your air conditioner hard, because you’ll need it and every ceiling fan you can install to pump air through your home all day long, all year long. Another important factor about windows is simply the direction they face. For example, if you like it cool, you should select a northern exposure, or alternatively, if you’d rather bask in sunshine all day long, then a southern exposure will be to your liking. A preference for cool mornings or cool afternoons will translate into a preference for western and eastern exposures, respectively.

SO MUCH FOR AN OUTDOOR LIFESTYLE. Patios were my second biggest disappointment with Florida apartments, and for similar reasons as windows. In general, they’re too small and confining to provide a relaxed, comfortable living experience. Most amazingly, few patios are screened-in to provide adequate protection from all those lower forms of life that seem to outnumber humans by many orders of magnitude, especially during the summer. In addition, surprisingly few have overhanging roofs or eaves to provide that little extra protection from sunshine and rain that at times can enhance the patio living experience. On the other hand, most patios have such poor views and overlook such noisy mechanical equipment that you probably won’t want to spend any quality time out there anyway. Those of you who look forward to napping on the patio will best appreciate the importance of these seemingly nitpicky comments.

Among other factors, don’t overlook the importance of elevation to the overall quality of the apartment living experience. Most of the apartment communities I visited charge a nominal rental premium for an upper floor apartment (approximately $25 per month), probably because upper floor apartments don’t have pesky noisy neighbors overhead throwing cigarette butts off their patios. They are also less likely to be flooded from rainstorms and tend to receive fewer visits from all those critters you’ll find on your unscreened patios (ants, spiders, lizards, etc.) that Floridians have learned to coexist with. However, along with the superior views and access to light and air that upper floors provide is the excessive heat and possibility of leaks (on top floors). Upper floor units sometimes offer the amenity of a vaulted or cathedral ceiling that can enhance the light and air or feeling of spaciousness in an apartment.

DON’T BE TOO IMPRESSED WITH ALL THE SHINY GADGETS. During most of my apartment inspections, the leasing representatives did their best to talk around the aforementioned design flaws and tried to “sell” me on all the gadgets and labor saving conveniences that typically come with luxury apartments. Many apartments come equipped with washers and dryers (which I prefer to be installed in utility closets off the kitchen or outside on the patio, instead of adjacent to carpeted living areas). By the way, if washers and dryers aren’t featured in an apartment, you better get a peek at your apartment community’s on-site laundry facility. Many communities offer dishwashers, garbage disposals, oversized bathtubs, microwave ovens, refrigerators with icemakers, and one or more ceiling fans, in order to enhance the comfort of their apartments.

MAKE IT YOUR BUSINESS TO STRETCH YOUR LEGS. After touring apartments that met my basic criteria, I spent some time walking the communities to get a sense of their residents, a feel for their comfort and ambience and to inspect their amenities. Also, as I strolled I took particular note of how well properties appeared to be maintained. Although most luxury apartments will be up to snuff on the day you move in, even the newest and best built will require routine maintenance and repairs from time to time. Walking around may also give you some insight into the mindset and proficiency of the management and maintenance crew. If the common areas are well maintained (e.g., clean and recently painted, parking lots well paved, landscaping well groomed, and few signs of deferred maintenance), chances are better that the same philosophy and vigilance will apply to the upkeep of your apartment.

The best single place for a maintenance inspection is the pool and its surrounding lounge area, which usually is the most popular common area within a community. Most leasing tours for prospective tenants begin with a tour of the pool area, which is usually centrally located adjacent to the property’s leasing and property management center. As a community’s showcase, these areas are usually better maintained than other less visible areas. So, if the pool area needs a renovation, you should wonder how the rest of the property looks.

SWIMMING POOLS OR CEMENT PONDS? Even if the pool area is well maintained, you may not be all that impressed with the scale and scope of those facilities. Before I started my search it was inconceivable that I would find such woefully inadequate pool facilities in a place where sun bathing and swimming take place more than 300 days per year. In general, pools are small and shallow (barely 5 feet deep in some cases), not very well maintained and surrounded with only enough lounge chairs to accommodate 5% of their tenant population. Most of the places I visited had whirlpool spas, but some are barely larger than bath tubs, are not particularly well maintained, and are as likely to be out of service as they are to be operating on any given day of the week. Even more surprising is the fact that some brand new apartment communities I visited, which typically pride themselves on being loaded with recreational amenities, are not even bothering to build these all-popular whirlpool spas into their otherwise state-of-the-art properties.

DO-IT-YOURSELF TORTURE CHAMBERS. In most cases, health clubs are small, dark unfriendly spaces that suffer from a serious lack of cable TV entertainment and exterior light and views. If I had to use such facilities, I know I’d be even more eager than usual to finish my workout. Except for basic treadmills, stationary bicycles and free weights, the other equipment in some of these facilities looks as though it is borrowed from The Smithsonian. As for other forms of recreation, some apartment communities provide tennis courts, bicycle paths, basketball courts and kiddy playgrounds, but not necessarily in a state of repair you might consider inviting.

DON’T TAKE ANYTHING FOR GRANTED. After one inspection, I started to pay attention to some of the amenities I would normally take for granted, such as where and how tenants go about retrieving mail or disposing of garbage. Tenant mail facilities range from the expected (i.e., located near apartments, sheltered from the elements by a breeze way or some other structure) to the ridiculous (i.e., all huddled together in the middle of a parking lot completely unprotected from the rain and sunshine, and dangerously close to moving vehicles). You may not mind waiting for the rain to stop to pick up your mail, but you can rest assured the mailman isn’t going to wait when he/she delivers it. If you live in one of those unfortunate places, you better have your mail delivered to a post office box, or get used to opening soggy mail.

As for the trash disposal, I resigned myself to the fact that the best I could expect would be having one large compactor and storage facility located near the exit of my community, regardless of how large an area that might be. The obvious advantage of such an arrangement is that tenants won’t have to smell or look at garbage anywhere else within the community and won’t have to be bothered by noisy garbage men carting it away in the wee morning hours. However, I’m still getting used to a routine of hopping in my car every time I need to dispose of trash or coordinating garbage runs with my daily travel schedule.

PEEK OVER THAT SECURITY GATE BEFORE SIGNING ON THE DOTTED LINE. Before registering a community on my short list of acceptable options, I made sure I drove completely around its periphery, and noted its proximity to public utility plants, highway interchanges, or some other equally undesirable land uses. In the process, I was sure to check out its neighborhood amenities, especially within a five-minute drive. Most appealing community locales were off main drags but near most of the daily conveniences I’d likely need, including supermarkets, restaurants, drug stores, banks, movies, etc.

Communities within 15 minutes of shopping centers, entertainment hubs and other desirable landmarks were placed high on my short list. As a contrast, some of the communities I visited were long hauls from commercial activity of any kind, and some were near special facilities I’d be more likely to visit on a monthly or annual basis, like Lowe’s Home Improvements, Home Depot, furniture outlets, vacuum cleaner distributors, and so on.

FINAL OBSERVATIONS. I am pleased to report that I live in a community that provides a reasonable blend of the four major features I had sought from the outset: decent living accommodations (spacious, functional layout, with a view); basic community amenities (good swimming pool and safe, convenient access to personal mail boxes and trash disposal facilities); abundant neighborhood shopping opportunities; and good accessibility to major highways and regional employment centers. Best of all, I reside near the intersection of two important road arteries, which means visitors can find me on a map even using the most schematic maps of the region.

Over the course of my inspections, certain facts emerged as apparent truths. And, you should be aware that some of the foregoing comments apply to other areas of Florida and other types of housing (like condominiums and single family homes) as well as luxury apartment rentals. Readers are encouraged to verify similarities and differences across geographic areas and housing types based on their own experience.

Some general comments are worth noting. Notwithstanding the extreme volatility in residential real estate markets recently, Luxury garden-apartment-style communities in this area of South Florida still rent for $1.00 (give or take) per square foot per month. That means a 900 square foot apartment will rent for approximately $900 per month. Not surprisingly, one bedroom units have the highest per square foot rents; three bedroom units the lowest. Some communities charge extra for water, sewer and trash removal. Most charge a rental premium for certain apartment views (especially golf course or lake views), upper floor apartments and pets.

Newer doesn’t always mean better and be aware that down here 10 years is considered old, if not a lifetime. Unlike other more traditional regions of the US, old residences down here are not considered classic, vintage, or quaint, but rather just plain obsolete and undesirable. However, as the expression goes, “they ain’t building them like they used to” and if you want spacious, well proportioned, logical layouts you’re going to have to look at the old stuff. The best compromise is to find an old unit that has recently been completely renovated and refurbished.

Age 55 plus communities cater to the seniors, but those without such designations don’t necessarily cater to the young single adult population. In my experience, the only tangible difference between the tenancies of the two types is the existence of lots of toddlers and teenagers in the latter.

Like everything else in life, tradeoffs do exist in trying to find that perfect blend of apartment features. In South Florida, within a given price range, if you want to be near the Ocean, you’re going to accept older, lesser accommodations. Newer properties tend to have more and better site amenities, such as pools, health clubs and tennis courts, but tend to be located farther away from regional employment centers and shops and facilities you’ll need to visit daily, such as food stores, restaurants, drug stores, banks, etc.

Finally, if you want to enjoy fresh air, sunshine and truly experience the lifestyle that has fostered Florida’s growth during the past several decades, you’ll just have to go to the beach!

South Florida Real Estate: Treasure or Fool's Gold?

2009-03-05T11:22:00.000-05:00

Many observers are pointing to falling home prices as a once-in-a-generation opportunity to buy homes, especially here in South Florida . They believe buying real estate in these distressed markets is child’s play, as apparently low prices seem to offer significant downside protection against further price declines. I think it’s more likely a game of high stakes hot potato, where buyers should reconsider their positions when the music stops and shudder at the potential consequences of being “fortunate” to win their purchase bids.

Buyers don’t want distressed properties; they want financially and operationally secure properties that happen to be available at distressed prices. But aren’t foreclosures and short sales (pre-foreclosures) great deals? Maybe. In the case of a freestanding single family home, a foreclosure/short sale may be a great deal. These days, however, many of the newer homes are available only within planned communities and come with financial strings attached, called homeowners associations (HOA). These HOAs cause owners to effectively become financial partners with everyone in their community. Buying foreclosures/short sales in these planned communities are trickier. A buyer may fall into a money pit requiring payment of a “special assessment” resulting from all the unpaid maintenance charges from other foreclosures in a community. (Mortgage lenders repossessing homes are not generally liable for the unpaid monthly maintenance charges and assessments of deadbeat borrowers.)

Condominium communities are potentially the biggest nightmare, because owners are so inextricably and substantively linked, e.g., they share roofs and walls, not merely some recreational common areas. Consequently, monthly maintenance charges tend to be much larger with condos than with other types of housing. In addition, communities that sold homes at astronomical prices during the height of the real estate boom, 2006 give or take a year, are most likely to have a higher percentage of foreclosures, because those owners are significantly upside down on their mortgages, i.e., they owe significantly more on their loans than their homes are currently worth. In extreme cases, special assessments can increase the ultimate cost of acquiring a foreclosure or short sale by several thousand dollars. Along with financial considerations, buyers should further consider the negative psychological effect of living in a community abandoned by a significant share of owners.

To add to the potential nightmare, today many mortgage lenders have very limited capital and lending to homes in problematic communities are not high on their list of new business opportunities. Such a lack of available liquidity hinders acquisitions by new buyers, further reduces prices and thwarts the operational and financial recovery of such communities.

Unfortunately, the dramatic imbalance of the supply and demand for homes, especially in South Florida, combined with the current difficulties facing our lending institutions, most notably Fannie Mae and Freddie Mac, means it will probably be months before our housing markets stabilize and years before they fully recover. Going forward, and once markets stabilize, mortgage lenders should be encouraged to subordinate their claims against homes to those of homeowners associations, thereby enabling HOAs to recover unpaid maintenance charges from lenders when foreclosures occur in the future.

Why propose an initiative that could potentially hinder new loan activity? I believe that encouraging lenders to reserve capital for homeowners associations like they already do for property taxes and insurance will reduce their loan-to-value ratios and ultimately improve the quality of their loans. Encouragement to secure the fiscal integrity of HOAs will in the long run prove beneficial to homeowners and mortgage lenders that right now need to be bailed out, and will favor all the taxpayers who ultimately pay the bill.

Manage Your Career or Someone Else Will!

2009-03-01T13:08:00.003-05:00

In the opening scene of “Annie Hall,” an old movie by master director Woody Allen, Mr. Allen tells a joke in which one elderly lady complains to another about the poor quality of food they’ve been served, and the other lady agrees but adds that she thinks the portions are too small. Mr. Allen makes the point that the joke depicts his view of life—that it’s filled with misery and unhappiness but it ends much to soon. Unfortunately, the sad truth is that most of us who’ve worked for many years feel the same way about our jobs, yet live in constant fear of losing them to a restructuring, a corporate merger, a new technology, and these days recession or even depression!

Ask seasoned working people how they feel about their jobs and more than half will tell you how they hate their bosses, feel unappreciated, or are just plain bored to death or trapped in a dead end. Internet based companies and the New Economy was supposed to change all that until things fizzled earlier this decade. So now what? While you’re waiting for that dream job to come along, you need to make the most of the career you have.

Know the difference between jobs and career opportunities. What’s the difference? Probably very little when you’ve just left school and need to start paying off those student loans. A “job” keeps you alive; a “career” can make you feel alive. I’d be the first to admit that when you’re looking for your first job and have little or no experience, just about any job in your chosen field may seem like a career opportunity. When you’re starting out, it’s far more important to validate yourself in the workplace than it is to worry about whether you’re doing your best for mankind or pushing back intellectual frontiers. Besides, during the first several months of a new job, you’re usually busy learning the ropes of business etiquette, such as how to answer a telephone properly, or how to communicate with your superiors, colleagues and others in your office.

Consequently, time spent at virtually any job in your field is probably time well spent—for awhile. However, if you’re in the wrong position, it won’t take long for the “honeymoon” to end and for you to lose your infatuation with the idea of being gainfully employed. Suddenly, getting up in morning is a little more difficult, the workday drags, you’re bored, and you’re downright annoyed to be asked to work weekends.

So now what? The good news is that whether you’re working yet or not, you’re still holding all the cards: you’re young, educated, personable and eager to start working! Now, all you need is a strategy. Don’t believe that every move you’ve made since elementary school makes a profound or irreversible statement about who you are and what you’re all about. Careers are durable and flexible and don’t need to be precisely calculated every step of the way to be successful. The marketplace is somewhat forgiving of a background that meanders a bit at inception, and sometimes sees some diversity as beneficial to a well-rounded professional in these times of smaller, leaner organizations whose members must wear many hats.

However, careers need to be managed, and preferably with some strategic focus that guides you toward some long-term goal. Also, the meandering that may be favorably viewed when you’re 25 can be viewed as a lack of focus or commitment by the time you reach 35. By that time, a career floating with inertia can become much more difficult to navigate, and you’ll be spending a lot of time justifying your past and proving your commitment to your next job.

Suffice it to say that your careers are likely to be far more varied and volatile than ever before. Long gone are the days of feeling secure, confident and comfortable by honing a set of specific skills that you will use for your entire career. The career ride going forward is likely to be bumpy and risky. You’ll need to run faster just to avoid falling further behind on the job!

If you take the following steps to manage your career, you’ll be more satisfied and may actually end up doing something you enjoy.

Step 1. Know who you are. Carefully consider your personality, aptitudes, talents, skills, personal values, interests, and most importantly, your likes and dislikes. Few things in life will give you more pleasure than being paid for something you love to do, so it’s worth spending time to get it right.

Step 2. Strategize, don’t predict, your career. Set goals and objectives, identify the universe of possibilities, seriously consider your options, and go for it! Just remember to be flexible and open-minded; even allow yourself to dream. Few accurately predict where they’ll end up when they begin their careers, but those who act deliberately usually get ahead. Never rule out the possibilities that an uncertain future might bring, and be ready to capitalize on opportunities that might arise by chance or just plain dumb luck.

Step 3. Hunt eagerly (but efficiently) for opportunities. Take advantage of the full spectrum of publicly available sources at your disposal. Read, surf the net, network with contacts, and collect information and ideas. Temper your energy and enthusiasm with judgment and common sense and pursue only the most realistic and promising opportunities. There’s no shortcut for hard work and the inefficient process of trial and error that will be discouraging at times. Remember: nothing ventured, nothing gained.

Step 4. Sell yourself actively (if not aggressively) to employers. Begin with the paper chase of resumes, cover letters, and follow up letters; continue with telephone cold calls, making your sales pitches and attending networking meetings, and eventually you’ll get your share of interviews. Face the fact that your future employers won’t know why they need you until you tell them.

Step 5. Critically size up your opportunities. Consider all the basics: company growth, profitability, reputation, the job itself and how it relates to your goals and expectations, and your new boss and colleagues. Be diligent in your review. Ask hard questions and be satisfied with the answers. Take the time to determine if it’s opportunity or just temptation knocking. You’ll make well-informed decisions if you temper the facts with your gut instincts.

Step 6. Weigh all offers. Most people want employers to show them the money. Money is the easiest way to measure an opportunity’s attractiveness and it’s the most universally accepted method of keeping track of your career progress. You need money to survive, but money alone won’t keep you alive. Early in your career, you should select opportunities that build skills and experience, which will make you more valuable and marketable in the long run. Take a long-term perspective when making decisions.

Step 7. Frequently review your career options. Has your job measured up to your expectations? Is it the best use of your time at this point in your career? Is it time to move on? Is it difficult to admit you’ve either made a mistake or have outgrown your position? Sure, the truth sometimes hurts, but remember it’s the lies that leave the scars.

Like it or not, you’ll repeat this cycle many times during your 40 year career, but practice makes perfect. You’ll learn from your mistakes and remember the lessons you learn each time through the process. Eventually, managing your career will get easier.

Some things will never change. Industries, companies and technologies will come and go, but the nearly 7 billion people on the planet are still creatures of habit who won’t likely abandon their ways of relating to one another. The bad news is that the unpleasantness of working for a living will continue, probably forever. The good news is that employers will continue to seek out the traits and talents in each other that have served mankind well since the dawn of time: the ability to think, apply oneself to learning, a willingness to work hard, and a cooperative attitude. If you’re willing to adapt to and embrace change, the future will be a very exciting place to be, especially considering the alternative; if you’re not, my advice would be to marry well, enjoy early retirement, and let the rest of us get back to work.

There’s no job like the right job. Some say the hardest job you’ll ever have is looking for one, but eventually everyone who wants one finds one. Finding the right job may take a lifetime, but having the wrong job can feel like an eternity. For more on the topic, readers are referred to Training Wheels: A Candid Guide to a Career in Business, available through www.Xlibris.com.

The Capital Gains Tax Paradox

2009-02-24T07:47:00.003-05:00

The Obama Administration is now considering nearly doubling the tax rate on capital gains when it should be seriously considering reducing or eliminating those taxes. Many economists assert that a reduction in capital gains tax rates will spur private investment in the stock market and ultimately help our economy recover and grow. The Obama Administration loathes the idea of cutting those rates for fear it will be criticized for offering tax cuts to the wealthiest strata of our society.

First, in these difficult times, every measure to spur recovery should be seriously considered as everyone will benefit from a strong economic recovery. Second, even though a reduced capital gains tax favors the wealthy who collect more capital gains, the centroid of securities ownership in this country is squarely in the middle class, not the wealthy. Half of all households, more than 100 million Americans, own securities. These owners typically have more than half their household financial assets in stocks and earn a median household income of $65,000. In today’s economy, these are not rich folks. The Obama Administration needs to acknowledge these facts. While it’s true that many owners hold securities in their tax-deferred IRA and 401K accounts that won’t benefit directly from a reduction of capital gains taxes, it’s also true that more than three-quarters of securities owners own some outside their retirement accounts. Also, if a reduction in capital gains taxes helps push up securities prices, all owners will benefit from the increase in wealth.

Third, given the fact that nearly half of global stock market wealth vanished within the past year, most capital gains have already been realized, taxed and ultimately lost by investors. Going forward, there will be few capital gains to be subjected to tax. In fact, on average at current index levels only investments made more than a decade ago will register any meaningful capital appreciation.

Last and most significant, it’s possible and ironic that the only way to stem the decline and reverse the stock market trend might be to eliminate capital gains taxes, thereby causing the impetus for new investment. Incremental new investments would push the market higher and lead to capital appreciation, i.e., eliminating the tax on gains may be necessary to produce capital gains going forward.

In view of these facts, a reduction or elimination of capital gains taxes could be a powerful stimulus for many middle class Americans, would cost taxpayers nothing in the short run, and minimally until both the economy and stock markets recover significantly. It would also be a no-risk proposition. If it doesn’t work, it doesn’t cost taxpayers anything.

Mark-to-Market Accounting May Be Chinese Handcuffs

2009-02-23T10:17:00.005-05:00

The financial crisis seems to be once again causing a market meltdown. The solutions offered to date, such as bank nationalization or some permutation of TARP, all would entail a massive writedown of bank assets according to the rules of mark-to-market accounting. That would render many of the nation’s leading banks, such as Citigroup and Bank of America, insolvent. Consequently and somewhat ironically, our efforts to free ourselves of this crisis could actually make a bad situation worse. The obvious if taboo course of action should be to reconsider the merits of mark-to-market accounting rules and examine their role in contributing to our financial mess.

Dissenters say that tinkering with the rules would be conveniently covering up fundamentally flawed bank business models and that it would be distorting reality to say that assets are worth more than indicated by those rules. However, the rules may be at the root of the problem. Experienced bankers know intuitively that a distressed market under duress does not function properly and does not produce true market values. Banks strapped for cash have dumped loan portfolios current in their payment obligations and collateralized by real assets for mere pennies on the dollar, as private investors line up and raise billions in capital to buy those assets. Mark-to-market accounting rules are forcing low-ball values today just as plainly as they over-inflated those same values a few years ago. Is that the reality we should be seeking?

Changing the rules for the sake of expediency makes no sense, but, by ignoring market conditions, the rules have dictated extreme short-term asset prices that bear no resemblance to their longer term and more realistic values. Also, changing the rules now may help us recover from the current crisis and as important prevent it from recurring in the future. Our goal should be to put in place a process that encourages willing buyers and sellers to freely trade assets. So long as mark-to-market rules provide private investors the possibility of “stealing” assets from banks at fire sale prices they will have no incentive to bid up those prices. Relaxing the accounting rules to take a longer view of asset values may enable banks and investors to trade assets at prices that both can live with, which will lead to true value, and ultimately free our financial system from its Chinese handcuffs.

The Obama Speculative Bubble

2009-02-19T10:11:00.003-05:00

Barack Obama’s Presidency represents the latest in a series of speculative bubbles in recent memory to challenge our way of life, like the Tech Bubble that popped at the turn of the millennium and the recent Housing Bubble, which has been belching air for the past couple of years. The “Obama Bubble” has been inflated by the worst economic and stock market downturn since the Great Depression, virtually one-sided media coverage in his favor during the Presidential primary and general election, and more money than has ever been spent by a Presidential candidate in our history.

Speculative bubbles occur when the public becomes so excited and enamored with some commodity that it abandons traditional and common sense approaches to analyzing its value, claiming that somehow a new relationship among variables has occurred and old analytic methods no longer apply. Somehow “it’s different this time.” During the Tech Bubble, tech stock prices exceeded levels normally dictated by company revenue and profitability. During our current Housing Bubble, home prices increased well beyond family incomes’ ability to finance and buy homes. Obama’s “stock” is now trading well above what a fundamental analysis of his candidacy would indicate. Obama lacks executive experience, possesses a limited professional track record and even some key members of his own party stated publicly during his candidacy that he lacked the experience necessary to be President.

Mainstream-media political analysts following presidential campaigns have historically given more consideration to candidates’ past deeds and personal associations than to what they say. Everyone knows that talk is cheap especially from politicians who will say almost anything to get elected. Yet many analysts were willing to take the Democratic candidate at his word, despite the fact that few of Obama’s words could be substantiated by past deeds. Media pundits were so captivated by Obama’s rhetoric and oratory performances that they readily gave him the benefit of every doubt on his positions and failed to critically review the viability and practicality of his policy proposals.

More curious was the complete lack of regard by analysts that an Obama administration would have extraordinary influence and power to push a one-sided liberal agenda, due to meaningful Democratic majorities in both the House and Senate. The current Stimulus Bill is a preview of how our national political system is likely to work at least for the next couple of years.

At one of the most critical times in our history, America elected one of the least prepared Presidential candidates in history, and circumstances gave him more power and influence than any President has held in recent memory. Barely one month into his Presidency, the euphoria of his election triumph is giving way to some serious cold hard reality and almost daily you can feel the air escaping the bubble. If the Obama Presidency were a stock, now would be a good time to sell!

A Stimulus Bill or President Obama's New Clothes?

2009-02-16T11:22:00.012-05:00

President Obama’s Stimulus Bill (the "Bill") should make any thoughtful person quake in his/her boots. Its current $787 billion price tag grows to more than one trillion dollars with interest over the next ten years or about $3,200 for each man, woman and child in America. It also represents more money borrowed in a lump sum than our Government has collectively borrowed here and there over most of its 233-year history.

The Bill was initially conceived as emergency legislation designed to soften the landing of an economy headed toward its worst recession since the 1970s. It has strayed considerably from that original intent. A recent commentary by Charles Krauthammer described it as an "abomination," which may be an inadvertent pun on Jerome Corsi’s book: The Obama Nation. Liberal Democrats, whose social policy agenda has been thwarted since the 1960s, loaded the Bill with new policy directives and spending programs inconsistent with and in some ways detrimental to its immediate need and purpose. The President admits the Bill’s emphasis is on spending, although he would also have us believe spending and stimulus are synonymous. As it stands, the Bill adds a measly 2-3 million jobs to the economy over the next couple of years, which translates into an outrageous price tag of $350,000-500,000 per job!

Acknowledging the inherent shortcomings of his Bill and to justify abandoning his commitment to post-partisanship, the President’s major endorsement of his Bill is that "it’s better than doing nothing," implying that Republicans are predisposed to inaction. The Republican response has been to first direct capital to address the housing/mortgage/banking problem at the root of our financial/economic crisis and then to emphasize proven tax-cutting measures to stimulate private spending by consumers instead of the Government. History and most economists side with the Republican strategy. The President’s other major endorsement is that "we need to act now." Temporarily eliminating payroll taxes for everyone could have been done overnight. Some Republicans claim they had a plan to create twice as many jobs at half the cost of the President’s Bill. Don’t we owe it to ourselves to hear them out? If our Government is going to blow a trillion dollars, prudence dictates it should make every attempt to get it right!

Even more disturbing than the President’s abandonment of his campaign pledge to work across the aisle with Republicans (only 3 in the entire Congress approved the Bill), is his apparent disregard for the advice of his own hand-picked economic experts. Key economic advisor and former Treasury Secretary Larry Summers stated clearly and early on that an appropriate and effective stimulus should be timely, temporary and targeted. The stimulus should create new jobs as quickly as possible, disappear when the economy recovers, and emphasize economic sectors likely to offer the biggest bang per stimulus buck. This Bill will likely fall short on those criteria. Furthermore, university economics professor and Obama advisor Christina Romer researched the issue and concluded that fiscal policy, whether it be in the form of government spending or tax cuts, does not provide an effective stimulus for economies in recession. Ms Romer also determined that apart from recession and in general a 1% tax cut produces a 3% increase in GDP, which most economists agree is far more effective than government spending in stimulating the economy. In light of all that, why does the President's stimulus strategy focus on fiscal policy and why does it emphasize government spending over tax cuts by a margin of 2 to 1?

The President claims to recognize the importance of our economic crisis and knows it will probably define his Presidency, yet curiously relinquished control of the stimulus legislation and delegated it to House Democrats who (he had to know) would seize the opportunity to draft a wish list of politically charged pork projects and social programs. After many iterations in the House and Senate, the result is a nearly 1,100 page document thrown together in a couple of weeks and revised copiously mere hours before its ultimate passage by the Senate. What happened to the President’s promise of transparency in the legislative process? Shouldn’t the President want to hear from a decidedly disapproving American public, if not congressional dissenters, before finalizing such a significant and transformational piece of legislation?

The President’s inspirational oratory about the need for and quality of his Bill rings hollow knowing that his White House played a minor role in its conception and no one, including members of Congress, read the complete document before voting to approve it. As responsible citizens and especially as lawmakers, they should know better and be ashamed of themselves. It would appear Democrats and the President have aggressively and hastily convinced themselves this Bill makes good sense and have done their best to bring Americans on board too. One has to wonder if this legislation in hindsight will be remembered as a Stimulus Bill or President Obama’s new clothes.

Bank Nationalization and/or Failure are Bad Ideas

2009-02-11T11:09:00.005-05:00

The stock market has spoken loud and clear. If we nationalize our banks or let them fail, we can forget about private capital as a source of bank sustenance, probably for a long time. When Congress initially voted down the Troubled Asset Relief Program (TARP) last Fall the market tanked further and faster than ever before in its history, and recent bank nationalizations in England and our own discussions about nationalizing banks here have produced a similar if less violent market sell-off. TARP’s original version of government purchasing toxic bank assets and selling them at auction still offers the best possibility of attracting private capital back into our financial system and probably at ultimately no cost to taxpayers.

Since mid-2007 we have witnessed unprecedented price volatility in our global stock, bond, real estate and commodity markets, which has shaken our understanding of how they work as a group and how they interact with each other. Even our heretofore absolute faith in U.S. Treasuries as the planet’s sole example of a risk-free financial instrument—one upon which all global investments are based-- has been called into question along with the overall credit-worthiness of the U.S. Government. In one year we lost or temporarily saved many venerable financial institutions some of which date back to our nation’s founding, such as Citigroup and Lehman. Investors have lost faith in corporate and political leaders and with good reason. All of these factors have permanently and dramatically increased the perceived if not actual risk of making investments. Americans lost an estimated $11 Trillion in wealth in less than two years. Many will consider long and hard before they make new investments going forward, which will raise the cost of capital and reduce its availability to our financial system.

Wiping out more private shareholder and bondholder wealth by allowing major bank failures and/or bank nationalizations could cause investors to flee the capital markets for years to come. Some version of TARP is probably the answer. It should be perfected and implemented. For those who think bailing out Wall Street and not Main Street is a bad idea, know that there will be not much of a Wall Street or Main Street without the private capital needed to form and grow new businesses that employ our citizens. For those who think bank failures are the necessary cost of capitalism, know that free markets and private entrepreneurship will suffocate without investment capital from our private citizens.

Bear Market Likely to Continue

2009-02-10T13:59:00.003-05:00

The odds are mounting against a return to DOW 14,000 anytime soon. There will be short-term bull rallies, but it seems likely that the bear that gripped the market in 2007 will hold on for many years. The conceptual if rudimentary explanation for my market pessimism, especially over the long term, is illustrated by the simple formula: Price = Earnings x Multiple. Stock market prices (Price) are the result of a complex and dynamic relationship between actual after-tax corporate earnings (Earnings) and the extent to which those earnings are expected to grow over time, which is reflected by a stock’s price/earnings multiple (Multiple). Obviously, stock investors would like to see all their stocks’ earnings and multiples expand steadily over time.

No one is predicting corporate earnings will rise in the next couple of years. The consensus view is that the current recession will last at least as long, which means GNP could fall and unemployment could rise well into 2010. Falling home prices and exorbitant consumer debt levels will curtail consumption and earnings levels accordingly. The Government’s Stimulus Plan may reduce corporate taxes and thereby modestly lift after-tax earnings in the short-to-medium term, but eventually tax rates will need to rise to pay for the currently exploding Government deficit already exceeding $1 Trillion.

Multiple expansion seems unlikely too. Although both macroeconomic and company-specific factors dictate their magnitude, multiples generally rise when inflation and interest rates are low or falling and overall economic and political risks are perceived to be minimal or contained. Inflation is low right now because of worldwide recession and deflation in global real estate values. Interest rates are artificially low because of the concerted efforts of the world’s central banks to pump unprecedented liquidity into global capital markets. Many observers expect those conditions to abate once the financial crisis and recession subside. Also, as the BRIC (Brazil, Russia, India, China) economies and others catch their breath and resume their heady economic growth and concomitant demand for resources, their growth will once again place significant price pressure on world commodity markets, especially oil, industrial metals and food. Consequently, accelerating worldwide inflation is reasonable to assume for many years to come. Inflation and growing government deficits around the world will inexorably push up global interest rates. Geo-political risks are already high and can be expected to continue from on-going turmoil around the world.

While resumed growth may be good news for the earnings side of the equation, high inflation, high interest rates and heightened geo-political risks are bad news for and likely to depress stock multiples in the future. Also, it should be noted that most of the upside in the stock market in recent decades has come from multiple expansion, not earnings growth.

The gloomy short-to-medium term outlook is likely to eventually work itself out, but no one seems to be considering the potential short and long-term negative effect that market shenanigans of past couple of years may have on investors’ attitude and appetite for risking new capital.

Unprecedented recent price volatility in our global capital markets has shaken our understanding of how they work and interact with each other. Americans lost $11 Trillion in wealth in less than two years. Even our heretofore absolute faith in U.S. Treasuries as the planet’s sole example of a risk-free financial instrument, and the basis of comparison for all global investments, has been called into question along with the overall credit-worthiness of the U.S. Government. It boggles the mind that in one year more than a dozen venerable financial institutions were lost or temporarily saved, some of which date back to our nation’s founding and early history, such as Citigroup and Lehman Brothers. These dramatic events occurred quickly and without warning and have caused many to lose faith, with good reason, in corporate and political leaders. All of these factors have materially and perhaps permanently increased the perceived if not actual risk of making investments. Reluctant investors demanding better risk-adjusted returns could reduce the availability of capital and raise its cost in the future. The end result: future stock multiples may be permanently reduced.

Based on the foregoing, and barring some unforeseen positive catalyst that dramatically increases economic productivity, or excites investors or changes the perception of market risk, such as the widespread use of the Internet in the 1990s, it is difficult to imagine a significant upside surprise in the stock market for a long time.