Joining the Chorus–Sequestration: Any Fiscal Austerity Now is a Mistake

Everyone with a brain has commented on Sequestration and what should be done instead–some with sound logic and facts and data to support their view. The most recent brought to my attention in a comment by Tom Gallagher, via RenMac, is an analysis of the impact of austerity in Euroland, “Panic-Driven Austerity in the Eurozone and its Implications“.

The best complete article on this topic and what else needs to be fixed in America–actually in Washington–was Fareed Zakaria’s in a recent issue of World Affairs, “Can America Be Fixed–The New Crisis of Democracy.”  It details the ills of the US and spells out some solutions. The solutions were summed up in a sentence in his second paragraph of the 10-page article: “The focus in Washington is on taxing and cutting. It should be on reforming and investing.”  In the same issue, Roger Altman, who would have been my candidate for Treasury Secretary,  wrote a rather optimistic article, “The Fall and Rise of the West.” asserting his view that the West would emerge stronger from this financial crisis. I think Altman is right if Zakaria’s prescriptions are followed. I would highly recommend both of these articles as well as the fall, 2012, issue of the World Policy Journal, which devoted the whole journal to the subject of Democracy. If you only have time for one article it should be Zakaria’s–an elegant and fairly complete synopsis of how we got to this point and what should happen to get us past it. Zakaria provides some very appropriate solutions, which unfortunately require our politicians, and to some extent, we, the people, to act responsibly. Unfortunately, there is no evidence of this happening either from the Administration or Congress or us. And, now that it looks like it will happen, Sequestration is getting a “…it’s not so bad…” rationalization from some who should know better.

I am hoping for a miracle, I guess–just a simple agreement to postpone this nonsense and any short-term series of compromises and truly to focus on a long-term well-vetted plan,with a clear understanding of timing and consequences, that results in “…reforming and investing.” I think the markets, companies and individuals would react well to this. There isn’t much substantive to add to what others have said. I simply urge you to click on the links above to understand a bit more of the madness that is rampant in Washington and its implications.

The Debt Ceiling, Long Term Deficit Reduction and Insanity

Having barely survived the Fiscal Cliff, we now face the prospect of the crazies using the debt ceiling as a second attempt to derail this recovering economy. Everyone acknowledges that we have a growing debt problem which must be solved. That is a long term issue and should be dealt with accordingly, as opposed to immediate austerity in the face of a fragile but growing US economy. Even the IMF has finally concluded that austerity at the wrong time and at the wrong level is not the answer.  Restoring the Payroll Tax is already a mistake. This is not the time to reduce any flows into this economy.  It is time to sit down and develop a long term plan to reduce the rate of debt accumulation via serious review of federal spending across the board, entitlement reform, tax policy and, at the same time, redirection of spending and policy toward areas that will produce long term economic growth and jobs in this country and the world. We know the levers that will produce growth–education, technology, infrastructure, energy independence, immigration.

We do run the risk of waking up one day and finding the global financial markets unwilling to finance the debt we continue to incur.  However, if we develop a serious long-term plan that begins to go into effect well before this administration is out of office, while still maintaining a growth path, the financial markets will likely be very supportive. Companies and individuals just need to know the rules and see an economy with opportunity. While it was a rather optimistic view, the forecast I made in December does provide at least a vision of what could begin to happen this year. Look at how global equity markets, including our own, have reacted to what was a modest resolution of the fiscal cliff. I would predict that if the debt ceiling increase is accompanied by the elements of austerity that the chief crazy, Mitch McConnell, wants to put in place immediately, financial markets will reverse in anticipation of a major slowdown in growth domestically with an impact on global economies as well.

Where are the folks that are prepared to have the discussions in meetings among disparate parties as opposed to fighting their battles in the media? This includes both sides of the aisle as well as the Executive Branch. We have a real opportunity to get this right. Let’s hope we don’t blow it.

The Fiscal Cliff, Long Term Deficit Reduction and Instant Gratification

Well, there was a form of Fiscal Cliff Resolution which appeared to make no one happy except maybe real people who got a little more certainty about how they need to handle their finances.  There seems to be general disappointment that the long term deficit problem was not dealt with.  Let’s state the obvious: the long term deficit problem is just that–a long term problem. Instant gratification is not required–except maybe for the securities markets. The short term problem, even for the securities markets and certainly for the commonweal, is maintaining the pace of a recovery that remains fragile. Why would any leader want to truly deal with a long term problem with a lame-duck Congress, particularly when the incoming Congress is modestly more in his camp? I would posit that he may not even want to deal with the long-term problems with this Congress if he has any belief that the 2014 elections could swing things even more his way as Congress continues to look political as opposed to statesman-like.

Right now, we need to deal with the short-term issues of maintaining this recovery. Some of the compromises made to get past the Cliff didn’t do that–the Payroll tax restoration being a big one.  No doubt there will be more compromises to get past the debt ceiling issues. However, I do believe it is becoming more difficult for the majority in the House to continue to hold a gun to this economic recovery. The majority in the Senate and the minority in the House need to do their part as well. In addition, the ratings agencies should also stop looking for instant gratification. The long term deficit problem must get dealt with, including entitlement reform. It will get dealt with because it has to and it can be done. If that takes two years, during which we continue to see a reasonable economic recovery, I don’t think that’s a problem. Maybe  is pays to take another look at what could be happening if we keep eliminating uncertainty and maintain this recovery.

Could the Labor Statistics be Rigged?

I just posted at comment at Marketplace.org in response to an article written earlier this year regarding data rigging. The conclusion of the article was that data are noisy, but rigging is not the issue. This, of course is all relevant given the Tweeter, Jack Welch‘s comment accusing the “Chicago boys” of manipulating the data. As Joe Nocera points out in his column today, the last accusation of employment data manipulation was by Richard Nixon of the BLS under his own administration when the numbers were more negative than he would have liked. I am not surprised that a former corporate CEO, particularly Jack Welch, would have so quickly jumped to a data manipulation accusation. Most public company CEOs are quite used to data massaging at least once a quarter to satisfy the stock market. I guess they must assume that everyone else does the same to meet objectives other than accuracy. Below is the posted comment to the Marketplace article.

If one looks at the history of revisions of economic data ranging from GDP to Labor Stats there is a pretty consistent picture. When the economy is declining the revisions tend to be negative. At turning points the revisions are noisy. And, in improving economies the revisions are usually positive. This is not always the case, but usually. We are in a slowly improving economy. The ADP employment reports which even Jack Welch, the tweeter, wouldn’t accuse of being rigged, have been better than the numbers from the labor department prior to revisions. The labor situation is quite dynamic—4 million people leave jobs and take jobs every month. The difference between those two represents the increase or decrease in jobs “created.” Take a look at http://bit.ly/NXCmxF, to get some more info on this. Whoever is president for the next four years will get credit for the continued improvement unless the crazies in Washington don’t deal with the Fiscal Cliff. I am optimistic.

A Brief Look at the World—China, the US, Europe and the Lake Forest Investment Society

I am heading out to Chicago for one of the triannual meetings of the Lake Forest Investment Society.  We have been meeting three times a year (yes, triannual can mean three times a year) for many years to talk about the economy and the markets, including providing some specific stocks for a “portfolio.” The best performing security for the period between meetings gets its touter a free lunch. The portfolio, an unaudited, equally weighted hodge-podge of names is actually up  427% vs. the S&P at 130% over the 16 years this group has been meeting.  The Society originated as a group of ex-Mitchell Hutchins employees and some of their favorite clients who wanted an excuse to share some provocative ideas on stocks, the economy, the world and life, eat high cholesterol meals, and maybe play a little golf. Some of the members and their origins have changed over the years, but the dialogue continues. The following are some thoughts I expect to share at the meeting:

China’s Role

This global deficit crisis won’t really be resolved until China enters the picture. China needs an export market to provide sufficient jobs while it tries to move to a consumer economy. It cannot find itself with a slow-growth economy if it wants to avoid political disruption, particularly at a time of leadership change. The developed world, both the US and Europe, needs to be showing some growth in order to be consumers of Chinese goods. With new leadership coming in 2012 there is an opportunity for China to provide some form of quantitative easing through the purchase of longer-dated securities or other mechanisms.  This could be combined with the purchase of real assets and intellectual property as well in both the US and Europe. Until we see some movement by China, the developed world markets will face continued uncertainty, as the resources available to resolve the European crises, specifically, are just not adequate. However, I doubt China will move until both Europe and the US take stronger steps on their own to develop long-term deficit solutions and near-term stimuli.

The US’s Role

Contrary to what has been a continual reduction in GDP forecasts and increasing odds of a double dip by the pundits, I think the US could show decent growth in the second half of this year—not enough to create a lot of jobs, but decent. This does assume that the Super Committee or some variation thereof comes out with a long-term deficit reduction program combined with some near-term stimulus, and Congress actually supports this effort. I think the odds are greater than 60% that they will. This doesn’t necessarily provide a boost for the second half of the year, but it clears the air for next year and eliminates some elements of uncertainty in the minds of business and investors. My guess is we could have one more horrendous scare, probably coming out of Europe, before the world comes to its senses and responds to what could be a real crisis otherwise. What needs to happen long term is a whole ‘nother post, but one could read Friedman’ and Mandelbaum’s new book, “That Used to be Us,” to get a sense of some of what has to happen.

Europe

What a mess. It does not appear that the mechanisms exist to deal with the Greek deficits without putting the European banking system and maybe some other financial entities at grave capital risk. Whatever does come out of Europe as a solution—and I think it will take the Chinese to at least have the appearance of a solution—growth will be slow, as the European banks will not be in a position to lend for some time.  This is an opportunity for the Chinese probably to the detriment of the US, if they choose to pursue it.  China bashing in the US will likely drive China closer to Europe. China can also be more specific in its actions by dealing with individual countries and companies as opposed to the Union.

Other Topics

In spite of what most of the Republican primary candidates say—Jon Huntsman excluded–climate change is happening. We have no coherent policies in place and what was previously there is slowly being dismantled in Congress and by the Administration. Fiscally, we don’t seem to believe we have the resources to tackle this issue now, in spite of the long-term job creation possibilities.  And, the fascination with “fracking” and what that could do for energy independence is in the forefront with massive resources from the energy industry devoted to selling the story. In the meantime the failure of an over-funded science project, Solyndra, has raised issues about government involvement in clean tech.  These are their own topics, which I will deal with separately in other posts. In the meantime, back to the LFIS meeting, I will have a hard time coming up with a good stock idea. My personal portfolio is in cash and private illiquid companies. My compatriots will have some very interesting ideas, particularly at this moment in the market. I am not so sure the public market is as cheap as many opportunities in the private market today, particularly away from some of the frenzy around social media and other Internet related companies. Maybe one more crack in the public markets will get it there if it is combined with some stimulus in response.  In the meantime, real private companies are having a hard time finding funds from the traditional venture capital sources. We appear to be going back to the original sources of capital for venture companies, rich families either in the form of family offices or direct.  They can name their prices.  We are back to the old maxim that one makes the most money on a good price going in vs. the price going out.