SLAPSTICK
August 23, 2010
Am I crazy, or is this Administration getting its ideas from old movie classics by the great Mel Brooks? The Vice President clearly is a character straight out of Blazing Saddles, and Obamanomics is an exact carbon copy of the preposterous rip-off scheme cooked up by Zero Mostel and Gene Wilder in The Producers. So, it makes a body wonder. But whether the President is going for comedy or tragedy is still open to question at this point. What is notis the fact that his rush to transform America along the lines of the European model is not playing well in Peoria. It is causing plenty of High Anxietyamongst many of us poor slobs out here in the hinterlands.
Reaction to the sight of oil gushing from the BP deep water well in the Gulf is a perfect metaphor for our angst. It captures the current mood of the country completely: a combination of anger mingled with utter disbelief. Fresh as it is on the heels of the colossal financial meltdown, it is yet another vivid reminder of the havoc that can be wreaked when Big Government and Big Business join forces. Mistakes and miscalculations are magnified exponentially. To witness gross incompetence on such a grand scale is appalling and periodically jars us from our slumber. It is especially disconcerting at a time when official efforts are plainly aimed at concentrating even more power, influence, and resources in the hands of a few. People find it a mite perplexing that officials in Washington are so eager to double down on a system that already is obviously out of control.
I hate to be cynical (no, I don’t), but the reason is no mystery. Each new regulation and piece of legislation provides politicians on both sides of the aisle with an opportunity to exact another pound of flesh from their corporate clientele, union bosses, the trial bar, special interest groups, and any other folks willing to pay to play. So, controversy is their stock in trade. The more they can keep things stirred up the better. Money talks nearly everywhere, of course, but no place on earth any louder than in our nation’s capital. Cha-ching! Health care is a prime example of how the process works. Drug and insurance companies, hospitals, lawyers, and physicians all were able to buy themselves a seat at the table. Everyone with a vested interest in maintaining the status quo or gobbling up an even larger portion of the economic pie was represented while patients and taxpayers (the folks picking up the tab) were given hardly any voice at all. Despite the lofty rhetoric, we were shuffled off to the sidelines and carved up like a flock of Christmas turkeys.
Expect the same treatment as the mega banks and brokerage houses, which the law was intended to rein in, unleash their army of K Street lobbyists to fashion the 2,300 pages contained in the financial reform package in their favor. By the time all is said and done, you can bet the final product will provide these behemoths with an even greater competitive advantage over their smaller rivals and expose taxpayers to substantially more risk than ever before as the definition of what qualifies as too-big-to-fail is expanded and moral hazard continues to run amok. But these are minor details in the minds of most politicians. Their chief concern is in seeing how many campaign dollars all of the haggling and horse trading over the various provisions of the new legislation can shake from the trees prior to the next election cycle. And that is the problem. So long as the cozy, symbiotic relationship exists between lawmakers and the patrons who fund their careers or can deliver a sizable block of votes, the rest of us do not stand a chance. The deck is stacked against us. And unless a fellow happens to have a lobbyist on the payroll or Congressman in his hip pocket, he is fresh out of luck.
This is the way it always has been, of course. Everybody knows that those who have the gold make the rules. The difference now is the price of poker has reached exorbitant levels, well beyond the reach of mere mortals. In this Age of free money and clever financial engineering, swashbuckling denizens of Wall Street are able to amass incredible fortunes in the blink of an eye and generate billions in trading profits like clockwork. Incentives to game the system under these circumstances are irresistible and temptation tough to pass up. Plus, there is a ton of spare change available to spread along the banks of the Potomac to grease the wheels of commerce. It is no wonder then that these giants fight tooth and nail to use their considerable clout to gain and maintain every advantage; and why it is unrealistic to expect this new legislation to materially affect the conduct of business at the corner of Broad and Wall. In the final analysis, the exercise has been little more than an extravagant bit of theater intended to soothe the jangled nerves of the masses and is unlikely to restore more than a tiny smidgen of sanity to the financial sector.
Lax regulations and ineffective regulators, while significant contributors, definitely are not the crux of our problem. The primary villain in this entire little drama has been the Federal Reserve and its decades- long policy of easy money. None of the other nonsense could have gotten so far out of hand were it not for the acquiesce, assistance, and tacit approval of my two favorite whipping boys, Alan Greenspan and Ben Bernanke, and a steady diet of bargain basement interest rates. In the vernacular of modern day psychobabble, these two fine gentlemen were "enablers," the Good Time Charlies who eagerly provided an endless supply of booze to keep the wild party going full blast. They were quite naturally the toasts of the town while the fun lasted.
However, now that the economy is suffering from the financial equivalent of a throbbing headache and a severe case of the delirium tremors, even the duo’s most ardent admirers are experiencing a tad bit of buyer’s remorse and beginning to question whether more hair of the dog is the best strategy to treat a nation that has become hooked on the sauce. My answer is no. Zero percent interest rates send exactly the wrong signal. They discourage savings, encourage excessive borrowing and speculation, distort asset values, and make it impossible to accurately measure risk since there is no reliable yardstick in the form of the true cost of money. It is an accident just waiting to happen.
And it has repeatedly. Authorities got the bubbles they went begging for but have no clue what to do when they burst. The prospect of making us go Cold Turkey terrifies them; so, they continue on down the same disastrous path, subsidizing bad behavior and creating the next disaster by throwing money at Wall Street in the vain hope that it will somehow, someday spill over into the real world. As the past twenty odd years in Japan has proven (and the past ten for us), it promises to be a long wait.
I have a bright idea for Helicopter Ben and his pals at the Fed. Do your job. Pursue a policy of sound money for a change. Sop up the excess liquidity that was created during the Crisis of ‘08. It served its purpose ages ago. Financial institutions have been given more than enough time to get their houses in order, and a few are churning out record profits like never before. Large corporations and many households are drowning in cash. The time has come to give some thought and consideration to the people with money in their pockets rather than holes. Interest rates should be allowed to rise to market levels so the frugal and others who successfully manage their affairs are rewarded and able to earn a fair return on their savings over and above inflation once again. And the free ride currently being given to rank speculators and government spendthrifts needs to be brought to an abrupt halt. They should be required to pay full freight to finance their incredible flights of fancy and feats of derring-do. Maybe then, some might not be quite so frivolous and harmful to our economic future.
I think people would be surprised by the results. I suspect funds would slowly begin to flow back into productive endeavors and the economy gradually would be brought back into better balance. And I have no doubt but what confidence would return as folks began to realize we were back on the right track. Increased returns would provide savers with more to spend and invest and take pressure off of those squirreling away money for their retirement as they saw earnings from safe investments rise. They would no longer feel pressured to stretch for yield and assume unacceptable risk. Potential home buyers would be pushed off of the dime if they became convinced mortgage interest rates were set to take off. The value of the dollar would strengthen, or at least stabilize; and money would return to our shores once everyone recognized that the U.S. was no longer pursuing a policy of confiscating wealth via the printing press and depreciating currency. Flash trading and all sorts of other speculative activity would become far less attractive without the lure of no-cost financing, forcing some of the slick operators on Wall Street to find a way to earn an honest living. Finally, citizens would get an accurate picture of the actual cost of this orgy of Keynesian style government spending and see in black and white that we are digging a hole for ourselves which is too deep to dig out of. I am not so naive as to think that raising interest rates is an instant panacea, but I do firmly believe it is an essential precondition before we can even begin to fashion a sustainable recovery. Just look how we were able to pull out of our nosedive in the early 1980's thanks to Paul Volcker.
The government changes its numbers so oftenthat it is tough to keep up. The latest figures from the Bureau of Labor Statistics have growth in GDP for the 4thQuarter of 2009 running at a rate of 5.0%, for the 1stQuarter of 2010 at 3.7%, and for the 2ndat 2.4%. But do no relax quite yet. Another release is set for this Friday, and the consensus expects estimates for the period just ended to be revised downward to something in the vicinity of 1.5%.
Regardless, unlike previous recoveries from severe recessions, the economy continues to display a decided inability to snap back decisively from the trauma created by the financial meltdown in 2008. The unemployment rate remains stuck near double digits, and the prospects for a quick turnaround are nowhere in sight. This is due in large measure to the government’s misguided response to the crisis. Their efforts to shield us from the inevitable pain that is associated with any contraction merely have prolonged it. Officials refuse to allow the markets to clear. The debris from the housing bubble still is floating around four years after it burst. The only difference is that taxpayers are on the hook for the tab along with trillions of wasteful spending related to the endless string of bailout packages. And I could go on. From the ill timed increase in the minimum wage,to the health-care legislation, to talk surrounding cap and trade and expiration of the Bush tax cuts, practically everything Washington has done has made a lasting recovery more difficult. They have gone to great pains, it seems, to pile mountains of uncertainty atop a considerable amount of unease so that our chief fear now is worrying about what the idiots will do to us next. Under these conditions, expect the economy to continue to limp along with growth in the 2% to 3% range until the clouds have cleared. And the odds of a double dip recession, while pretty long, are not completely out of the question.
The Market continues to muddle along, apparently unable to get out of its own way. Right on cue, the downdraft in June and early July ended and was followed by a weak summer rally which now appears to be petering out as we tiptoe into the three worst performing months of the year for common stocks. No one would or should be surprised if this develops into a full blown correction sometime during September or October. There certainly are plenty of precedents and potential land mines just waiting to explode.
If events unfold according to plan (my plan, that is) and the Market makes a successful test of its July lows around the 9,500 level as measured on the Dow and 1,000 on the S & P, I encourage investors to commit additional funds to the Market in a fairly aggressive manner. I think such a signal would provide us with some comfort and confidence that the Bull Market is here to stay for awhile. And as I said in the last newsletter, I believe that solid, good quality companies provide folks with the best protection, among a plethora of admittedly poor choices, during these turbulent times. So, I would use the current lull to get my buying list ready.
Best regards,
Sennett
MEMBER: SIPC & FINRA INC.
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