Alan Moore Commentary 1-1-2011

Alan Moore Commentary 1-1-2011


alanmoorecommentary.blogspot.com

     As I stood at the counter of a Taco Bell ordering my lunch that comes with a free drink to seniors, I couldn’t complete the transaction because I didn’t have my wallet with me and had to trudge back to the car to get it; but it wasn’t anywhere to be found. As I searched, it dawned on me, from the colored beads hanging on the mirror, that I was in the wrong car; and so I jumped out quickly and found mine close by, but couldn’t get in because I couldn’t find my keys. Going back into the restaurant, the teenage order-taker held up my key chain when he saw me and said: "Dude, you can’t do the car without these! My grandfather forgets his all the time." Imagine my hurt from his impudence: moi…. mistaken for a grandfather? Compounding my frustration, my wallet wasn’t in the car, so Taco-less and hungry, I sped home for some money and got a ticket on the way: two tickets actually, one for speeding and one for not having a license. It wasn’t a good day and it made me think about claiming my social security early. Reflecting further on these events, I tried reciting the Gettysburg Address that I memorized in High School; I could still do it, which led me to believe that I am not old, just growing older. However, the "die is cast" and I am certainly not getting any younger and can’t avoid a colonoscopy any longer…….. My risk-taking days are behind me and I can afford to eat at Taco Bell from now until deficit-doomsday, if I can keep track of my wallet and my colon holds up. I only confess my slight ‘faux pas’ so you can understand why an affinity for cash correlates directly with age: there just isn’t enough time to make it back if you lose it in the stock market or any market. Compounding my anxiety, Taco Bell may have grandfathered-in the free senior drink, but my wife prefers lobster. It all comes down to the wallet; for me at least, it is not the size of the wallet that counts, it is the wallet in hand at the taco stand---- if memory serves me right.
   Although investors lament the lack of GDP growth, the Merrill Lynch bullishness index is at an all time high and the average cash allocation by investment managers is down to 3.5%, usually it is 6%. On the surface, two other bullish signs are the VIX Volatility Index which has dropped to 16 in the wake of some very large uncertainties and margin debt hit $300 billion, which is back up to the 2007 bubble level. Under the surface, the VIX may signify complacency -------too many people are in the market and even borrowing to buy stocks, banking on significant GDP growth next year. Still, as the VIX collapses, corporations continue to pile cash on balance sheets; it now averages 10% of their assets. Obviously, they are vexed by the VIX, playing it close to the vest and not investing yet. On the bearish side, money is leaving Muni bonds as state budgets collapse, and interest rates are moving up despite QE-2. The next big thing will be massive municipal bond defaults requiring a QE-3. In the mean time, credit card debt has fallen 10% and consumers are starting to spend again, even though debt levels are still very high; albeit, not all retailers are doing better; this was announced 12-14-10:
" NEW YORK (MarketWatch) — Best Buy Co. reported an unexpected decline in fiscal third-quarter profit Tuesday, as lower demand for televisions and videogames led to a sales shortfall in the U.S., spurring the No. 1 U.S. electronics retailer to cut its full-year forecast. Same store sales were down 3.3%. "
     Despite sagging Best Buy stores, revised numbers on the shrinking trade deficit will have a positive effect on GDP in the 4th quarter, it may come in closer to 3% than the projected 2.5%; still, I will stay in cash a while longer, because this news will cause interest rates to rise more. The dilemma is: which cash to hold; the Euro is going to weakened more when Spain blows up, and the dollar will continue to move all over the place: I don’t know much about the British Pound and all the others trade in small volumes and are manipulated by pegs and capital controls. Therefore, in a default to ignorance, I stay in dollars. Eventually, I think the European Union will collapse and the German Mark will be resurrected. Germany is the real strength in Europe and I can’t imagine the Germans being so stupid as to jeopardize their financial stability by co-signing the proposed "Euro-bond- slush- fund" in order to bail out the PIIGS whenever they pig-out. The Germans know the PIIGS will never pay off the bonds in full at maturity, and this proposal is just another punt of de-unification. Even if Merkel supports the PIIGS, the voters won’t in the next election.
      Politically, Sara Palin seems to be ahead in the polls for the Republican nomination in 2012, but she is not my "cup of tea", party or not. I see on her reality show that she can shoot caribou and catch fish with the best of them. She has become a media phenomenon, promoted as a gun toting, bear-tracking, plain-talking, true- grit pioneer one day and defender of the faith the next; as if skeet shooting qualifies her to be Commander in Chief of the military and religious fervor is a substitute for leadership. I think she lacks both skills and god help us if she is elected. Who could be more divisive than Bush and Obama? Sarah could. By just running, she could fracture the Republican Party like the last time Caesar said hey to Brutus on the Senate steps. I can see the headlines now: "Sarah Im-Palin Boehner."
      This was announce d on MarketWatch 12-1-2010:
"Ninety three thousand private sector jobs were created in November according to ADP." "For the unemployment rate to remain at 9.6% employers would have to add up to about 150,000 jobs each month just to keep the unemployment rate steady, said Dan Greenhaus, chief economic strategist with Miller Tabak. "You would want to see 300,000-plus jobs created a month to start meaningfully impacting the unemployment rate," Greenhaus said. Elsewhere Wednesday, outplacement firm Challenger, Gray & Christmas reported that November’s pace of downsizing "surged" to the highest level since March, with employers announcing plans to reduce payrolls by 48,711 jobs."
       Subsequently to the ADP report, the unemployment rate went up to 9.8% on December 3rd as the Government said only 39,000 jobs were created in November. The Labor Department subtracted 300,000 jobs, as a "seasonal adjustment", from the data that month to reflect the temporary hiring done by retailers; that negative effect may reverse in December (WSJ 12-4-10, pg A4). Despite the data plugs, Christmas spending will be up a lot, perhaps as much as 5% over last year; albeit, retailers will be tenuous about permanent hiring due to shrinking margins; therefore, I expect a blah jobs number to be reported next Friday mainly because of the added "seasonal adjustment". Three hundred thousand fictitious jobs will be added in to offset the layoff of temporary help due to the end of the Christmas buying season. Unemployment benefits stop at 99 weeks and there will be no shortage of 99ers in 2011: That will be the Grinch that steals Christmas zeal.
      The big picture concerning the relationship between GDP growth and employment was defined by an advisor to President Kennedy, economist Arthur Okun---- Okun’s law, as it became known, says: "GDP growth of 2.5%(the natural long-term growth rate) is necessary to just maintain the unemployment rate where it is, and for every 2 percentage points above that rate, the unemployment rate will drop by one percentage point." If Okun’s law holds true, it would take sustained GDP growth of 6% for a year to bring down the unemployment rate to 7.8%------ fat chance of that happening in 2011.
    Whatever next Friday brings the jobs picture does not bode well in 2011, even though the tax compromise promises hope ------not from the extension of Bush tax cuts------ from the reduction in the payroll tax rate from 6.2% to 4.2%, which is additional cash flowing to spenders. The 2% drop will mean anyone making the SS wage base of $106,800 will receive a $2,136 tax cut on top of the old Bush tax cuts. Who said Obama wasn’t a good Republican? Anyway, let’s hope some of it trickles down to support home prices, which are projected to fall another 10% according to the Case-Shiller Index, as another avalanche of foreclosures occur in 2011. The foreclosure moratorium, quantitative easing and deficit spending just punt the debt problem down the road, and that may work until we get bogged down in inflation. Despite the problems, the Dow climbed a "wall of worry" and rallied more than 260 points on the day of the ADP jobs announcement; then went another 100 when the tax compromised was announced and kept going. Long-term treasuries have dropped 15% in price in a month and bond-holders are selling, moving the money into the stock market in search of alpha. Several readers have questioned my 100% cash position in emails back and forth that went like this:

Me: "you want answers?"
Reader: " I want the truth."
Me: "You can’t handle the truth.
Even though your portfolio hasn’t gone anywhere in a decade, your house is underwater and you haven’t gotten a raise in three years….. I stand on that wall of worry watching for bubbles coming out of the abyss. I didn’t create the abyss, the politicians did; and you want me on that wall, you need me on that wall to warn you of unfathomable government policies that can destroy whatever assets you have left. The truth is the financial hole is getting deeper with every quantitative easing, with every bailout, with every bill passed in Congress requiring more spending. I can’t in good conscience recommend the stock market just because everyone is doing it. The economy is going sideways until the QE-ball hits the ground; and which way the ball bounces is hard to tell------That’s how a punt works, but 4th down and ten is nothing to cheer about."
  
   That ball took a bounce toward recovery in December following a sharp uptick in consumer spending, and a 17% increase in car sales in November and a better manufacturing report. It is the next bounce I am worried about. The ISM order index has been declining for four months and inventories are now quite large---Is a strong Christmas enough to change that? The diesel fuel use index has declined for several months; therefore, fewer goods are being transported----- this index has been the best directional indicator of all. In addition, the European debt problem will persist and inflation is rising fast in India and China. Otherwise, the glass is either half empty or half full depending on whether you are an optimist or a pessimist. Being neutral by not owning any stocks or bonds, I look at the glass and see it as being twice as big as it needs to be. There is a lot of excess capacity in the economy in the form of human capital that must be budgeted as overhead for at least 99 weeks: by that time, skills have rusted and the house is history, while good jobs remain a myth.

     Due to a provision in the Financial Regulations Bill passed last July, the Federal Reserve Bank had to come clean on where the bailout money went. It turns out, that starting in September of 2008, 3.3 trillion dollars was advanced to banks all over the world, not just to the ones in the United States. Apparently, we bailed out Germany, Switzerland, France and the UK in addition to the five biggest banks in the USA and various hedge funds; we even saved Harley Davidson. There is little doubt that the real panic occurred at the top: with Bernanke in Washington on speaker phone, Paulsen and the heads of the largest banks (Jamie Dimon of Morgan and the CEO of Goldman Sachs in particular), huddled in a room and quaked with fear………. putting out propaganda that the ATM machines would stop and small businesses would not be able to issue payroll checks if any one of the major banks failed. That was a bunch of crap. There was no panic on Main Street; it was all on Wall Street. There is no doubt that half the bailout money was wasted and everyone should know which half. The local banks always had deposits on hand to cover checks, and ATMs are electronic devices that don’t cease to work unless there is a power outage. All bank accounts were guaranteed up to $250k and the FED placed an unlimited guarantee on business transactional accounts under the "TAG" program—payrolls were never in jeopardy. The wasted half was the bail-out of corporate executives and shareholders, when 98% of bank deposits were insured. The bailout was a shame and just another punt for bank leverage and CEO tenure. Bernanke was interviewed recently on 60 Minutes and his upper lip quivered uncontrollably the whole time; particularly when he was asked about the Fed’s role in creating the housing bubble: He said he didn’t see it coming……… The Chairman of the Federal Reserve Bank, with a PHD in economics and all the data in the world at his finger tips, didn’t see it coming. This is the guy in charge of the economy.

     I allude to punting because I was the punter on my college football team. Standing 14 yards behind the line of scrimmage, with my eye on the center, I could always see the whole field before the ball was snapped; albeit, once it was kicked, I could never predict where it would bounce. I feel like I’m still in the same position observing the stock market, because there is no one down field that can catch--- and the ball is in the air.
    The "value proposition" of the metaphor is that you can explain a complex economic situation or theory with a simple story. That is not to be construed as talking down; it is talking straight to reason.
   Here is another point driven by a metaphor…………… Kim Kardashian, playing golf while being pressured by the press, hits a ball into the rough landing in the middle of an ant village; she proceeds to swing her club repeatedly, missing the ball every time and tearing up the ground in her wake of divots. One of the last ants left turns to another survivor and says: "If we are going to stay alive around here, we better get on the ball." (Economic translation: the Federal Reserve Bank’s repeated QE swings at GDP growth are going to eventually tear up the economy and the only safe place to be is in cash. Otherwise, trust Bernanke to replace your portfolio divots----Isn’t that what a "Fed Put" is all about?) I think Bernanke has as much control driving the economy as Kim does driving a golf ball. They are both "famous for doing nothing" and don’t perform well under pressure.
        The pressure will come when inflation hits 3% and there has been unprecedented interest in commodity investing with that scenario in mind. As a result, commodity prices are high, maybe even bubble high. Investment managers are buying them for inflation protection, but really as a speculative trade; although, commodities only 45% correlate with the CPI during periods of very high inflation such as in 1980; otherwise, they do not offer much protection at all (Financial Times 12-13-2010, pg. 2). The so-called super cycle in commodities is not supported by the data over the last 75 years, which is punctuated by sharp rises in commodities for a short period, only to be followed by decades of falling prices---take gold for example (1979 to 2000)—as interest rates rise, gold will suffer.
      Of all the doubtful inflationary hedges, a TIPS bond could be a decent long-term investment (Note: only the yield is protected, not the price of the bond which will fluctuate inversely with interest rates); I still think buying foreclosed real estate is the only game in town and I continue to make random offers----no luck yet, the banks take months to even look at my offers.
     In the case of inflation, the bond market will ultimately control it, not the Fed (the Fed will raise rates belatedly, after a big rate-rise occurs in the markets). A 5% inflation rate over a quarter or two would jack the corporate bond rate up to 8% and the economy would double dip, thereby bringing the inflation rate down fast. Normally, inflation travels in cycles that last two to five years; this time may be different because of today’s debt levels, which are twice as high as in the early 1980s. In addition, it will be hard for inflation to exceed 3% without some stellar job growth increasing wage pressure, and employment is generally forecasted to remain anemic through 2011.    
   Businesses are now generating the same revenue and profits as back in 2007, with 7.5 million less workers---why would they ever hire them back if they don’t need them? That is the basic problem: a sideways economy is not good enough to increase jobs. Therefore, pouring onto the national debt won’t do much for employment, it will only make an interest rate induced spending contraction more severe when inflation does appear, even if a little bit. There is no quick way out of the problem and quantitative easing is not the answer………….. that is like giving a drunk a bottle at an AA meeting to stop his shaking, so he can stand up to confess at the podium----with the launch of QE-2, the drunk is now standing there mumbling something. Nevertheless, ending government stimulus cold turkey won’t work either. The best case scenario is for the consumer to not spend more in lieu of paying down debt and increasing savings, over the next four year period. That way, the economy could regain sustainable growth after real buying power was restored. However, politics interfere with forbearance, and the government continues to pander to delaying the inevitable: a decline in asset prices to the bargain point, which would stimulate real demand.    
    Currently, money is running out of bonds into the stock market pushing up multiples and I have no idea how high it will go. The money has to go somewhere, right? Risk says that trade is crowded, and I prefer being wrong in cash, rather than right in stocks, even as the rally continues and the economy slowly recovers. Just remember, my view of risk should not be your view, because we all face different situations. I know my risk tolerance, but you must determine yours.



　
　
　
　
　
　
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Alan Moore Commentary 12-1-2010

Alan Moore Commentary 12-1-2010                    alanm@slavic.net

     The elections have given us gridlock and you couldn’t pass gas in Congress now. Despite the platitudes, Boehner hates Obama and Obama hates Boehner, meaning the deficits are on automatic and the wars will drone on even though Iran is secretly winning both of them behind our backs using bribes: the military is powerless to stop it, to even see it in the “hoods”.  From now on, the President is a lame duck and has no real power; neither do the Republicans or the Democrats. The only game left in Washington is Quantitative Easing and this is how that should go:  If we see the Fed actually stepping up with a bigger QE-2 ($1 trillion or more over six months), the stock markets will surge more and bonds will tank after the initial Fed purchases are made. Actually, the Fed announced a $600B purchase plan, which caused short-term interest rates to fall a bit and long-term rates to go up, because the Fed declined to buy any long-term bonds. No matter what term they grab, the full scope of the plan means the Federal Reserve Bank will buy 50% of the bonds the Treasury issues next year to pay for the deficit (foreigners are supposed to kick in for 30%, leaving only 20% for the general public to buy).  It doesn’t get any more Ponzi than that, especially when you consider the Treasury will pay the Fed interest on the bonds by creating more bonds, which, in turn, the Fed will buy with more book entries. Like magic, the Fed could do a $4 trillion QE and Bernanke wouldn’t even blush, as he promoted the policy like he does all of them, with the line: It will provide “balanced and sustainable growth”----some people call it the “BS” line for short.

    Going forward, at least we shouldn’t be getting any new laws and regulations out of Congress for awhile, and I thought that called for a celebration; so I took my wife to a fancy restaurant for diner, but the maitre d’ wouldn’t let me in without a tie. We discussed the issue intently at the door with no resolution. After some time, I went back to the car and got my jumper cables and arranged them tie-like around my neck, and went back. The maitre d’ and I had more words, but he finally said: “Ok, go-on in, but don’t start anything.” Right then, I had to love the guy, remembering what my father always said: “a stranger is a friend waiting to happen.” My father was a people-person and I am trying to be more like him……… Too bad Boehner and Obama aren’t strangers.

       Just six months ago the EU did a stress test on the banks in Europe and all of Irelands big banks passed, now we learn they are busted and need a bailout----our stress tests were just a whitewash like the ones done by the EU----- Next Portugal will go down in February and then Spain in the spring-----.  Inflation may die in Europe’s austerity budgets, but I am plagued with the thought that food prices in America have already surged to a new record and oil is up to $85 a barrel, not to mention that health care costs are up 12% this year. The only thing keeping the CPI at bay is rent-equivalents, which for some unknown reason represent 30% of the CPI index calculation. Between rents and the exclusion of food and energy prices from the core inflation statistic(PCE deflator), it appears consumers are getting a free ride to buy big, with interest rates so low. If they take the bait and spend, we are headed for a disaster a few years from now. One of the misconceptions the Republican Party gleaned from the Reagan tax cuts in the early 1980s was that they were responsible for the economic boom from 1984 to 1990; the tax cuts were not primarily responsible and there is no bipartisan economic study that says they were. The problem is not high taxes, it is spending and the resulting debt load.     

      Therefore, along with all of Asia and Europe, I feel worried about the $600B QE, as it appears the Fed is walking the line between inflating the economy and inflating inflation, and I really don’t think they know where the line is. Trying to be objective, I can see there is a strong case for some QE as long as inflation stays dormant------ No QE and we will stay in a liquidity trap, because people don’t want to borrow and spend; as they already have too much debt and home prices are still falling. The one shining light is the decrease in the productivity rate to 2% last month, from 7% three years ago. Private employment always picks up when productivity falls to the point businesses must hire new people and we are at that tipping point. On the other hand, profit margins increase when productivity rises, because fewer workers are needed to produce the same amount of products. You can fire people and, statistically, it will show up as an increase in productivity; albeit, that phenomenon is not occurring anymore and any good news on employment will mean profit margins will shrink, which would be bad news for earnings going forward. Don’t get me wrong, I don’t think the 151,000 new jobs reported in October was good news because the government threw in 200,000 fictitious jobs as a seasonal-adjustment factor in order to produce that result (Barron’s, 11-8). They split the adjustment allocating 100k to September and 100k to October, meaning there were only 51,000 new jobs created in October, which was less than the 71,000 economists expected. No one seemed to notice the adjustment at the time or characterize it as fraud, but government reporting is an on-going crime scene if you ask me.

      Because of a lack of evidence, quantitative easing hasn’t been convicted of an economic crime yet, although the innuendoes are all bad. The economists that claim the Fed is just printing money are wrong: practically zero of the excess bank reserves have leached into the economy ----- 2% GDP-growth and a 1.4% inflation rate are prima facie proof of that. However, the case isn’t closed: potentially the reserves could monetize, but, so far, they haven’t. With the Fed’s obvious intent to commit inflation, individual stock picking is a risky endeavor because the macro environment will determine the return verdict. The Chinese slump, the Korean dispute and the resurrection of the European debt crisis are closing in on us like black swans in a swamp. The macro impact can be seen in the correlation ratios of the different asset classes, they all swing together these days, bound together by artificial, low interest rates. For example, the recovery, spurred by QE liquidity, has been good for bonds, stocks and commodities at the same time, but not for Main Street or the jobless. That is not the modus operandi of asset prices, which means there is no way to diversify properly in a portfolio…………..which could be construed as a crime against investors if the market robs them again in broad trading, like it did in March of 2009. In the mean time, my prosecution of QE rests, on cash.      

    The global system risk is inflation; if it suddenly appears, the power of all central banks will be curtailed as interest rates rise around the world---19 members of the G20 are already targeting price levels versus their economies. Obama and Bernanke stand alone against the world: if they are wrong, we are screwed; our gridlocked Congress could never agree on fiscal stimulus and the fate of the economy would be left entirely to the markets. The last time the Fed employed the easy-money policy for such an extended period was in the late 1970s; starting in 1977, under President Ford, and culminating in the reign of Carter. Fed Chairman Arthur Burns expanded the money supply by 13% for three successive years, thereby driving up inflation to 10% by 1981 (back then consumers were borrowing the excess reserves-----but currently M3 money growth is only 3%). Burns did that to spur the economy out of GDP stagnation caused by the 1975 recession (by the way, Burns invented the term “core inflation” in 1977 to combat criticism caused by a rising CPI index). He was given the mandate to primarily target the employment rate with the Humphrey-Hawkins Act passed in 1978, and secondarily to target inflation. That mandate still exists today; although, millions of people have been out of work for so long, they have forgotten what work they are out of. The Republican administration launched the recession in 2007 and the Democrats grew it into the “Great Recession”.  President Truman was an old-time Democrat and he said, “The buck stops here.” Obama is a modern Democrat, and he says: leave more bucks here and I’ll take care of everything. There is nothing wrong with a Democrat if you compare him to a Republican……..a buck is a buck, no matter who spends it where; and neither one of them have a clue how to buck-up a budget. That is up-beat as I can be on the elections last month; the voters didn’t elect anything new, they passed the buck. The only political figure today with the administration skill to run the government is Indiana Governor Mitch Daniels, who was the former director of the Office of Management and Budget under George Bush. He could decipher the congressional bills and balance the budget, but he can’t sling words well enough to be elected President. Don’t take that as an affiliation with any political party, I’m not affiliated; I dislike both of them equally.

    Before the Christmas break, and before the mantel of power in the House passes to the Republican majority, is the only period in which the Bush tax cuts can be extended before they expire on January 1^st; ----and then everyone’s taxes will go up next month if an agreement is not forthcoming. With no resolution, incomes will drop automatically due to increased payroll tax deductions:  it may take two months to work out a tax compromise, which will probably result in an increase for the rich (whatever that means) and a roll-back for everyone else. However, it will come too late to save GDP in the first quarter and spending will be flat to down. That effect will be impossible to overcome with quantitative easing. Not extending the tax cuts will also be a big deal to the stock market, because the capital gains tax on dividends will rise, meaning stocks that pay them will become less attractive; millions of people rely on dividends to live and their incomes will fall, even though they aren’t branded as rich.

   Another GDP kicker will be the two million people that will see their unemployment benefits expire in the next two months, if they aren’t extended by Congress (their 99 weeks are up). Do you really think the Republicans and Democrats can agree on an extension, say to 2 ½ years? Even if they do extend it, a worker who is on the dole that long probably forgot all his skills.  Right or wrong, if an extension isn’t granted, spending will decline automatically. So here is the total rub, a Congress that can’t agree on tax cuts and can’t agree on unemployment benefits will mean that the economy will slow in the first quarter of 2011, just because people will have less income----- That conclusion is elementary and unassailable----- Therefore, my defense for being in cash rests………. on Congress.  

    Perhaps the greatest flaw with the elected and with the leadership at the top is the lack of practical experience: I doubt whether anyone in Obama’s cabinet has ever changed a tire on a car or run a company; their education is extensive, but their ignorance is encyclopedic. Larry Summers, Geithner and the Federal Reserve Board are consummate academics following a textbook script disconnected from common sense. For that reason, I think it is best to bet against the government’s stimulus policy because it ignores rational consumer behavior, realistic funding and the international backlash to QE-2. Cash is that bet against Obama, Boehner and the whole rat pack in Washington: Congressional committees are just a device to turn coffee into laws that don’t make sense. Should QE-2 work somehow, and I don’t make any money because I’m not invested, then my life will stay the same, which is fine the way it is in its frugal way. My wife, who never shops in a store smaller than a football stadium, dryly pointed out that my cash theory filled a much needed gap in my investment plan: she also expressed that view more succinctly by saying, “you’re missing the boat dummy” (A person like me could be dumb and not know it, but not if he is married.).  I could only respond: “I know you are probably right dear, but please give it a rest, we worked hard for the money”…………………After all, my theory may be crazy, but is it crazy enough to work?

     Now I will tell you about the antithesis of Quantitative Easing, as being utilized in China and Singapore. Even though those countries have surpluses and huge reserves, they recently issued sovereign bonds to sop up the liquidity consumers have there. By selling bonds to the public, China can absorb some of the cash floating around, thereby reducing spending and inflation. Economists call this policy “sterilization of the monetary base”, and many PHD dissertations have been done on the subject, but none have really added any information to the sentence above. Academics aside, the Chinese are realists and they can afford a little sterilization with a 9.6% GDP rate---we sure can’t. Nevertheless, if the money keeps flowing into China due to trade surpluses, but gets tied up for several years in time deposits, bonds and capital controls, then it can’t flow into real estate speculation and other things. In other words, the money will become “sterile”. To accomplish this objective, the government must issue bonds that pay a higher rate of interest than the banks and the inflation rate, even though it does not need the proceeds to operate. If monetary officials start to see an economic slowdown, they can always redeem the bonds early and thereby throw money into the system. Our Federal Reserve Bank is trying to do just that by redeeming bad mortgage loans at the banks and giving them money in return; money that disappeared in losses and doesn’t exist anymore: albeit, they want it to exist again through consumer and small business loans, but that isn’t happening. The immediate problem we have is not QE, because it has not been effective. Fiscal policy is the problem due to excess spending that is creating deficits that must be substantially bailed out by China. Forty percent of the bail money is coming from foreigners and what happens in China, won’t stay in China, it will come here. I sure hope they don’t have a big slowdown; sterilization is one thing, but jacking up interest rates there would jack them here, and QE-2 would turn into Titanic-2. Not to get you worried, but China, Australia, India and South Korea raised interest rates again last month. Asia tightens monetary policy as we loosen it, tic for tac. To boot, these were Obama’s “loose-money” words last month in a speech: “The Fed’s mandate, my mandate, is to grow our economy.” The German finance minister countered: “Americans accuse the Chinese of currency manipulation and then artificially lower the dollar with quantitative easing.” At the G20 conference, Obama gave his pitch to rally the world behind our monetary policy, but he was interpreted by the other nineteen members to mean: If I ask for your opinion, I will give it to you. How humble is that?  Obviously, the Town Hall thing doesn’t work in a country haul.

   The Chinese tried to “sterilize” population growth in the 1980s by making it against the law to have two children; one was promoted as ideal. However, the government didn’t take into account Chinese culture which values male children above females. Many couples dumped their first child in the river or aborted if it was a girl, wanting to have a boy on a second try; and it happened that the male population swelled bigger than normal. This gave government birth control a bad name, but too late to prevent the big social problem in China today, which is a lack of brides, as well as an aging population that used to be supported by a robust proportion of young people. China doesn’t have a social security system---the children are expected to support their parents in old age. Likewise, Japan also had the same problem and lost its growth economy fifteen years ago----- It is still lost because old people don’t work as hard or as cheaply as youngsters, therefore productivity goes down. In America, our population spread is ok, but the unions make our economy old, because their members don’t produce as cost effectively as regular workers, so we have much the same problem as Japan in drag------ our jobs are dragged to China and India by higher profits there. If you still can fantasize about the productivity of unions, just follow the success of GM’s VOLT when it’s rolled out next year from the unionized, DHAM plant in Michigan. The $41k price alone will gut your budget for horse power---------and  Nissan is coming out soon with their all-electric car(LEAF) priced at $32k. GM will produce 10,000 VOLTs next year, while Nissan will make 50,000 of the new LEAF. GM is afraid of a massive recall, so they are limiting their exposure to that risk, but they are sure milking the electric hype. Supporting the “New GM” is a $7,500, Obama tax-credit for suckers that buy a VOLT, as a subsidy for green technology that appears brown if you look closely. GM recently announced the VOLT wasn’t all electric: it uses gas also, meaning it is really a hybrid………. Go figure why the VOLT gets the credit and the Prius doesn’t.

   There is another bailout coming, even after the public offering at $33 a share: GM retains a  $45-billion dollar tax deduction for losses it had before the ownership change in 2009, whereby the government took over 61% of the stock in exchange for $50 billion in cash. Under the tax code, such a change in ownership would normally kill any loss carry forward tax benefit. However, the bailout bill from Congress included an exception to the code, and GM won’t pay corporate tax on the next $45 billion in profits. In other words the taxpayers bailed them out once and will be doing it again. Net-net, it still costs taxpayers every time a bolt is screwed on a wheel in Detroit, even if we get our money back from the sale of the stock, which we won’t unless the next stock offering is sold at $53 a share. Of course Wall Street promoted the IPO hard and it was oversubscribed by institutions because appearances rule the market. Generally, the Wall Street deals are led by promoters that are narcissists by nature and prone to grandiosity; that is part of their charm: they leap from one scheme to the next, indifferent to losses and unable to focus on the slow and boring work of building a solid business over many years. They sell with slick presentations and well-rehearsed enthusiasm, talking-up a persuasive business plan using sound bites such as: scalable, burn rate, positioned-for-growth, and the value-proposition-------- I prefer hearing the story from a veteran manager who has spent his career actually running the company. There have been 3 CEOs at GM in 3 years; so there is no history of leadership there. What I think investors are looking for today is access to industry specific knowledge and facts, versus salesmanship and hype. From Wall Street to Congress to the Federal Reserve Bank, we continue to be plagued with hyperbole, sound-bites and incompetence. My advice is, don’t be a lemming.

    Another buzz word often used by investment promoters is diversification; and, I will point out that downside protection comes from being price conscious and diversification is really a euphemism for ignorance. For example, if you don’t know much about a stock that you buy, then at least don’t buy much of it; in fact, most investors should just own index funds and quit trying to pick individual stocks. However, if after careful study, you think you know what a company is worth, say Exxon at $60 per share and you buy a little, and then it drops to $56, I would buy a lot of it. Currently, at $69, Exxon is not a buy, but it is a small piece of every index fund, which is the best way to buy into the market high, if you must follow the crowd and the urge for a higher return. At $56, and with very little debt on their balance sheet, I wouldn’t shrink from allocating 15% of my portfolio to that stock, because I don’t want to be diversified particularly, I just want to buy low, in whatever asset class offering that opportunity. That’s my investment strategy in a nutshell, which is a mockery of “Modern Portfolio Theory”; actually, the market has made a mockery of that theory over the last couple of years. In short, either get a bargain price or skip diversification and stay in cash, because there is no such thing as diversification in an asset correlated market, like we have today. If you are 100% invested, you are concentrated in risk, unless you bought low and have dividends to sustain you through the volatility. Exxon, for one, has that potential. Watch it, anything below $60 is a buy in my theory: one day it might even get there.  

         As a side note, on Wall Street, Main Street, or any street, Bernard Baruch was the best investor that ever was in my book; in his memoirs, Baruch listed some rules on investing in a chapter entitled “My Investment Philosophy.”  These rules could be useful to you in the future.

    1.  Don’t speculate unless you can make it a full-time job.

    2.  Before you buy a security, find out everything you can about the company, its management       

         and competitors, its earnings and possibilities for growth.
        

    3.  Don’t try to buy at the bottom and sell at the top.  This can’t be done--except by liars.

    4.  Learn how to take your losses quickly and cleanly.  Don’t expect to be right all the time.

         If you have made a mistake, cut your losses as quickly as possible

    5.  Don’t buy too many different securities.  Better have only a few investments which can be

         watched.

    6.  Make a periodic reappraisal of all your investments to see whether changing developments    

         have altered their prospects.

    7.  Always keep a good part of your capital in a cash reserve. Never invest all your funds.

     8.  Don’t try to be a jack of all investments.  Stick to the field you know best       

Amen,

Alan