The Venture Capitalist vs. The Vulture Socialist

Posted on January 26th, 2012

Campaign Quotes Out of Context by Nate Beeler, The Washington Examiner

By George Neumayr

Obama’s parasitism is far more destructive than the “Bain mentality.”

Put the worst possible construction on Mitt Romney’s career as a venture capitalist and it still looks much better than Barack Obama’s. Pecking at the entrails of a limping economy, Obama is the vulture socialist.

A president who promised to bankrupt the coal industry is in no position to gainsay Romney’s record of job creation at Bain Capital. Romney created at least 100,000 jobs in private life; Obama created none. Then Obama entered office and racked up a record of job destruction that would give even the most reckless corporate raiders pause.

The vulture socialists feed off an economy that they could never create. Parasitism defines their existence. To the extent that it exists, Obama’s moderation consists of keeping the golden goose of capitalism alive just long enough to pluck its eggs.

Were Obama to start an economy from scratch, it would look like the late Soviet Union’s. His de facto socialism is the spoiled and ungrateful child of Western capitalism. Take away the reviled rich and he would have no wealth to seize or workers to exploit.

Democrats and liberal pundits chortled over Romney’s remark that he enjoys firing people. Now we have got him, they purred. But in context the comment is blameless, as even the gaffe-prone Joe Biden acknowledged. What Romney obviously meant was that he likes the freedom to choose services. But to the vulture socialists who circle over companies dying from taxes and regulations choice is suspicious. They speak of economic freedom as an intrinsic crime.

Obama’s use of class warfare is pitiful. His hack adviser David Axelrod, dusting off this rhetoric, tried out the phrase “Bain mentality” the other day. This apparently is supposed to strike fear in the hearts of Americans.

Romney’s feeble Republican opponents, scrambling to find any available cudgel, speak darkly of Bain Capital too. Leave it to politicians of the GOP, justly called the Stupid Party by wags, to attack Romney not for his liberalism but for his capitalism. One can be conservative and condemn the excesses of free enterprise, but Newt Gingrich, Jon Huntsman, and Rick Perry haven’t even come close to proving that Bain Capital constituted one. Where is the evidence for Romney’s crass corporate raiding? That the New York Times says so? This is pathetic.

Newt and company had months to pop the wheels on the Romney juggernaut. But they just sat on their hands, letting the knives aimed at his liberalism rust. Now they content themselves with throwing pebbles at his passing caravan. Few primary voters care about Romney’s good-faith failures at Bain Capital, but they might have cared about his pro-choice past. Most probably don’t even know about it. In recent days, Gingrich has talked a bit about the Romneycare dollars that went to Planned Parenthood but not with anywhere near the same level of animation that he has devoted to the subject of Bain Capital.

Bitter that Romney’s supporters have portrayed him as a man of flabby character for his Inside-the-Beltway slumming, Gingrich had to find a similar line of character attack and hit upon Bain Capital as his only option. But who was going to take this seriously? Newt himself didn’t even take it seriously at first. In an interview with Fox’s Sean Hannity before the primaries, when Newt was still riding high in the polls, he mused in a moment of expansiveness that his comments about Bain were foolish and simply a result of Romney getting “under his skin.” Mitt “won that round,” a magnanimous Newt said.

Romney is still winning rounds, as voters can see that he is personally upstanding and that these lunges at his business record are nothing more than opportunistic hot air. Whether Romney’s streak can continue in the general election is an open question, but this much is clear: the vulture in the race will not be the Republican. (my emphasis)

By George Newmayr for The American Spectator

By permission The American Spectator

http://spectator.org/archives/2012/01/12/the-venture-capitalist-vs-the

George Neumayr is a contributing editor to The American Spectator.

Straightening Out the Strait

Posted on January 26th, 2012

Strait of Hormuz by Osama Hajjaj, Abu Mahjoob Creative Productions

By John Browne, Senior Economic Consultant to Euro Pacific Capital

Recently some of the fears that investors had focused on in the 11th hour debt negotiations in Greece have drifted southeastward towards the Strait of Hormuz. An increasingly bellicose Iran threatens to throw the world economy into confusion with the potential closure of one of the world’s most important sources of energy. Catastrophic failure in Athens or the Gulf could plunge the world into severe recession if not depression. Having discussed the Eurozone at length, we focus this week on the threats posed by Iran.

Some twenty percent of the world’s oil supplies pass through the Strait of Hormuz, which lies between the Hormozgan province of Iran and Northern Oman. Some 230 miles of heavily fortified Iranian coastline, which includes the Iranian naval base of Bandar-e ‘Abbas, dominates the Strait. Although U.S. and allied naval ships are deployed in force around the area, a mass attack of small missile equipped marine craft would present a serious threat. Even the deployment of Russian made, remotely detonated sea mines could close the Strait for weeks if not months. In such a situation the price of oil could skyrocket, acting as an additional tax on a sputtering world economy.

As Iran struggles with increasingly painful international sanctions stemming from the nearly universal opposition to its nuclear ambitions, and as it courts the possibility of an Israeli strike against those facilities suspected of developing nuclear weapons, it is desperately searching for a counterweight to keep its enemies at bay. It likely sees its control of the Strait as a means of economic blackmail. Unfortunately for the Iranians, even if it could resist the naval power of the United States and its allies, such a blockade would inflict even greater proportional harm on its own economy.

However, it is important to note that if a confrontation were to unfold, the possibility for an Israeli strike increases significantly. Such an attack, which could possibly involve nuclear tipped munitions, would draw worldwide outrage. Furthermore, even if Washington were to condemn such an attack in its harshest terms, the Arab world would assume that the Israelis acted with full support of the United States. They would likely be right.

This whole sorry picture brings into focus the ill-judged and hugely expensive pre-emptive attack on Iraq in 2003 and the arrogant extension of the war in Afghanistan beyond the so-called al-Qaida to the Taliban. Another Western attack on a sovereign Muslim country would further embolden jihadists around the world.

America and its allies are currently withdrawing from Iraq and Afghanistan without achieving the strategic objectives that put the troops there in the first place. Indeed, the situation on both fronts is considerably worse than it was before the invasions. As evil as he was, Saddam Hussein was the strong man of the Middle East, who held Iran in check.

Today, Iran dominates the chaotic situation in Iraq. Furthermore, it now holds sway over much of Afghanistan, where the Allied campaign has failed to deliver a victory. Instead, our involvement there has opened the door for Iran and has widened the rifts within Pakistan, which is now much more likely to collapse utterly in the wake of our eventual withdrawal from the region.

These strategic setbacks to the east and west of Iran have severely limited Washington’s leverage with Tehran and have emboldened the ayatollahs to adopt a more confrontational stance. Just a few months ago, the Iranian government organized (through poorly disguised proxies) a pointless attack on the British embassy which resulted in a rupture of diplomatic relations between the two countries. Such moves may be designed to increase international concerns that Iran is simply reckless and unpredictable.

While talking tough, the U.S. is showing ever greater concern with the possibilities of an uncontrollable Iran. There has been increasing chatter that President Obama is now prepared to talk directly with Tehran, a willingness that may upset other anti-Iranian allies such as Turkey and Saudi Arabia. If the Saudis feel sidelined or if they come to see the U.S. as an unreliable guarantor of Middle East peace, they may decide to abandon their long held support for American policy interests.

As a result of the diplomatic mess, investors should consider the renewed possibility of armed conflict in the Persian Gulf. It should not be ignored that, in a possibly tight election this fall, a “wag the dog” scenario with Iran is not beyond the realm of possibility. A war, or even an escalation in tensions, could be a deciding factor in allowing an incumbent president to maintain power. By secretly encouraging conflict, a sitting president could find substantial political benefit, even while maintaining dovish rhetoric. Although Obama came to office promising change, some things never do.

In light of these persistent concerns (as well as recent OPEC pronouncements that $100 oil poses no threat to global economic health) investors should harbor no illusions that the recent surge in petroleum prices will ebb anytime soon, if ever. Investments that offer exposure to non-Middle East petroleum should beckon. (my emphasis)

By John Browne, Senior Economic Consultant to Euro Pacific Capital

www.europac.net

John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

The State Of The Obama Stock Market

Posted on January 25th, 2012

Wall Street Roller Coaster by Jeff Parker, Florida Today

By John Tamny

“The federal government is the only entity left with the resources to jolt our economy back to life.” – President Barack Obama, Confidence Men, p. 186

It’s often been said in various ways by economic thinkers of the classical school that booms and bull markets don’t die of old age, rather they succumb to policy failure. Economies, and by extension stock markets, in this certain sense do best when policy barriers to productive economic activity are light.

But with policy from fallible politicians ever present irrespective of political party affiliation, mistakes are inevitable. And because they are, the stock markets thankfully exist so that investors can cast ballots on decisions emanating from Washington.

It’s said that news about President Hoover’s future intent to sign the Smoot-Hawley tariff over 80 years ago sent stocks cascading downward, and then in 1987 stocks were similarly spooked when a combination of tariff threats with Treasury Secretary James Baker’s ill-fated comments about dollar gave investors yet another shock on the way to a 22% market plunge. Policy matters, and as investors are tautologically buying future dollar income streams, a comment by a Treasury official seeking a weaker greenback logically scared many investors to the sidelines.

The role of economic policy as it applies to the direction of stock markets bears renewed mention given the views of our current president, and our understanding of the state of the stock market. From them investors can hopefully divine a better sense of how the markets will perform owing to greater knowledge of the kind of policy that might emanate from Washington.

Up front, it’s hard to be terribly optimistic about future vibrant markets of the Reagan 1980s and Clinton 1990s variety. As the quote leading this article makes very plain, President Obama sees the government as the main source of growth given his presumption that it alone at present has the resources to nurse our economy back to health.

Of course what’s perhaps missed by a President whom former Fed Chairman Paul Volcker once described as “too self-confident” is that governments don’t have resources. Their resources consist of their ability to tax or borrow always limited resources from the private sector in order to engage in forms of economic intervention.

The problem here is that to the extent that governments tax in order to spend, they’re by definition raising the price placed on productive work. Taxes are a certain cost barrier foisted on economic activity, and then when governments borrow money in order to spend, they’re necessarily extracting limited capital from the private sector that might otherwise fund future wealth creation over near-term capital consumption by the political class. Stock market indices render judgment on the quality of companies within, along with their future prospects, and if the price of work and capital is being increased through taxation and borrowing, this on the margin will weigh negatively on stock market health.

It’s also been uttered over time that “personnel is policy”, and the individuals Obama has surrounded himself with in order to advise on economic policy require prominent mention. Looking back to April of 2009, seeking ideas on how the government could lift economic spirits, the President didn’t bring in a mix of economic viewpoints, rather he called to the White House Joseph Stiglitz, Paul Krugman, Jeffrey Sachs and Kenneth Rogoff.

So as opposed to a spirited debate among economic thinkers about how to best get the economy moving again, those in attendance encouraged even more government spending; Stiglitz calling for $2 trillion. Though the President would have been advantaged by contrarian views, it’s apparent that early in his presidency he surrounded himself with thinkers eager to confirm what he’d already concluded.

Considering the economists working under President Obama within the White House, upon accepting the President’s offer to head up his Council of Economic Advisers, it’s been reported that Christina Romer had “Rooseveltian fantasies dancing in her head.” Though it’s accepted logic in some quarters that President Roosevelt somehow saved the United States from certain desperation with his New Deal, saner minds might point out that the first nine years of his Presidency amounted to a great deal of economic hardship followed by the horrors of war and the relative economic autarky that came with the last four years of Roosevelt’s time in office. Far from an era of economic renewal, the Roosevelt years were characterized by a great deal of economic pain, thus raising the question of why Romer would want to promote policies that would give Americans a repeat of a not so grand period in our history.

In the same meeting, Obama casually observed to Romer that “It’s clear monetary policy has shot its wad.” Romer’s scary response, which perhaps foretold the Administration’s endorsement of the Fed’s quantitative easing policies that have weighed heavily on the dollar was, “No, you’re wrong. There’s quite a bit we can still do monetarily, even with historically low interest rates.” This is important to consider in light of what investors in the stock market are once again buying: future dollar income streams.

Returning to stimulus spending, once the initial $787 billion bill failed to reduce unemployment (quite the opposite as classical theory would suggest), rather than admit to what hadn’t worked, the economists Obama surrounded himself acted as though the initial amount hadn’t been enough. Orszag called for $700 billion in new spending while allowing for the political difficulties of achieving such a number, then Romer weighed in that even $100 billion, at $100,000 per job, would be the correct move. In her words, “A million people is a lot of people.” You can’t make this up!

President Obama, sensing the political difficultly of more government spending, instead offered up the opinion that “high unemployment was due to productivity gains in the economy.” Seemingly lost on the President is that there are no jobs without investment, and investors as a rule are attracted to the kind of productivity the President decried.

Happily in a small sense, National Economic Council Chair Lawrence Summers disagreed with the President’s analysis, as did Romer, though their analysis was equally deficient. Romer observed that “What was driving unemployment was clearly deficient aggregate demand.” Not mentioned by Summers, Romer or anyone near Obama is that in order to stimulate demand one must stimulate the supply side of the economy; as in remove barriers to economic activity erected by Obama and his White House predecessor. The reality that production is what drives demand has had no voice in the Obama White House.

Classical economic theory tells us that there are four main barriers to economic activity; as in the production that drives the aggregate demand that Summers and Romer pined for. First up are taxes. Taxes as mentioned earlier are a price placed on work, so the lower the cost of productive work effort, the more work that reveals itself. Regulations by nature inhibit productive economic activity with little positive effect (figure banking remains one of the most heavily regulated sectors with no positive impact as evidenced by 2008), and then trade restrictions retard the natural expansion of the division of labor that stimulates production, plus the restrictions/tariffs themselves invariably subsidize weak industries at the expense of the strong ones necessarily hurt by trade barriers.

Looked at in light of the Obama administration’s economic policies, if re-elected Obama will allow the abolishment of the 2003 Bush tax cuts (arguably the lone positive economic development of Bush’s hopeless Presidency), regulations on finance, healthcare and energy have already gone skyward, and then by all measures, trade has become less free since 2009. With stock markets serving as a future-discounting barometer of our economic health, the Obama administration’s unfortunate policy decisions in these three areas help explain a stock market that is flat over the past year, and would on their own would point to difficult economic/market times ahead.

Of course left out in the above is the fourth economic input; specifically stable money values. Stable money is easily the most important of the four to economic health, yet here the Obama Treasury is failing most impressively, as the Bush Treasury similarly did with its own support for a weak dollar, and its failures point to listless markets in the future no matter the direction of the other three.

To understand why, it’s essential to reference a recent New York Post article which revealed that over the last 10 years the S&P 500 Index had risen 7 percent versus a 479 percent rise in the price of gold. This glaring disparity should horrify investors.

Figure that gold has highly limited industrial uses, yet over the last ten years an investor would have achieved exponentially better returns for having committed all available capital to gold over some of the most promising companies in the United States.

Looked at in this light, is it any surprise that job creation remains sluggish, not to mention the fact that Americans have for the most part experienced one of the more difficult decades on record in terms of economic growth?

A rise in the price of gold tautologically signals a decline in the value of the dollar. From an investment perspective, when those with capital commit it to new ideas their explicit hope is that some time in the future they’ll achieve returns on funds invested greater than what they initially committed.

Of course the problem with currency devaluation of any kind is that assuming returns on monies invested, those gains will come back in cheapened dollars. Though many economists and commentators wax poetically about the wonders of competitive devaluations, simple logic tells us they dampen growth. The latter is largely driven by investment in productive concepts, yet devaluation removes the incentive for intrepid investors to offer up capital to those same concepts.

Importantly, investors don’t simply disappear during periods of monetary mismanagement, rather they reorient their investing styles. Instead of providing capital to future-oriented concepts that would in some instances enhance our productivity, and boost stock market indices, there’s a greater incentive to move their dollars into inflation hedges that will protect them from the devaluation.

Economic historian Brian Domitrovic described all of this very well in his 2009 book, Econoclasts. As he put it so clearly then about what occurred during the similarly devaluationist decade of the 1970s, “As for future stuff, it cannot be produced without investments in financial assets. The shift into tangibles thus prefigured a decline in production.”

Perhaps put more simply, when the value of money is in decline, investment on the margin flows into hard assets – think gold, land, art, and rare stamps – that already exist, and it flows away from the stock and bond investments that will foster the creation of the wealth which doesn’t yet exist. Devaluation is in this certain sense a blast to the past as investment in tomorrow’s ideas is no longer as plentiful.

And then happily for the purposes of this piece, we can compare stock market returns in the ‘70s and over the last ten years to the returns achieved in the ‘80s and ‘90s when gold weakened. The results are pretty striking.

In the 1980s the price of gold fell 52 percent, and the S&P rose 222%. Fast forward to the 1990s, gold’s descent continued on the way to a 29% decline which occurred in concert with a 314% increase for the S&P. As mentioned earlier, Investors are buying future dollar income streams when they put capital to work, so rising stock markets logically coincide with periods when the dollar is similarly strong.

Considering the Obama stock market, the price of gold since 2009 has more than doubled, which means the value of the dollar has declined. At present there’s no evidence that the Obama Treasury or the Administration have changed their tune on dollar policy, which tells us that continued dollar weakness will coincide with stock market returns that leave much to be desired. Putting it plainly, the Obama administration is violating the four basics (taxes, regulations, trade restrictions, dollar policy) that always coincide with economic and market health when they’re moving in the right direction, and stock prices will continue to reflect these policy errors.

More broadly, it’s very clear that far from believers in the fundamental ability of economic actors to create prosperity through rational, unfettered self interest, Obama et al believe that the federal government should have a very relevant role in boosting our economic spirits. Given the bad track record among governments when it comes to creating prosperity, it should then be said that assuming an Obama victory in 2012, stocks will only rally after to the extent that investors price in political barriers that will block the President’s desires. In short, the outlook for stocks going forward isn’t good, and they’ll only rally to the extent that the President fails legislatively. (my emphasis)

By John Tamny for Real Clear Markets

By permission John Tamny

www.realclearmarkets.com

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com).

EPA’s Killer MACT

Posted on January 25th, 2012

US EPAEDITOR’S COMMENT: These comments provide  an excellent example of the far-reaching impact that the rules and regulations promulgated by the EPA have on our way of life and our economic well-being. The recent MACT rule clearly would not survive any cost-benefit analysis, as it expected to result in an additional $11 billion of new costs versus a supposed benefit if only $6 million. Unfortunately, the EPA did not want to wait until alternative sources of power could be obtained, so the expected result in about three or four years will be a shortage of power in certain parts of the U.S. Nice going!

As Alan concludes, as part of its agenda, the EPA’s new rule “is about deliberately depriving the nation of energy which in turn means less jobs, less growth, and a third world lifestyle being imposed on Americans by the radical environmentalists inside the Obama administration.” This intentional lowering of our standard of living has simply got to stop!

By Alan Caruba

To understand how the Environmental Protection Agency operates, one must first understand that it lies all the time. Its “estimates” are bogus. Its claims of lives saved are bogus.

It thrives on scare-mongering to a public that is science-challenged, but the science remains and the EPA must be challenged to save the nation from the loss of the energy it needs to function. It must be challenged to unleash the huge economic benefits of energy resources—coal, oil, and natural gas—that can reverse our present economic decline.

The latest outrage is the MACT rule—an acronym for “maximum achievable control technology” intended to reduce mercury emissions and other trace gases. The rule is 1,117 pages long. Its purpose is to shut down coal-fired power plants that generate over fifty percent of all the electricity used daily in the United States of America .

The value of the total benefits asserted by the EPA is alleged to be $6 million. Not billion, but million. The MACT rule would force 14.7 gigawatts—enough power for more than eleven million households—to be “retired” from the power grip in the 2014-15 period when the rules take effect.

Sen. James Inhofe (R-OK), the ranking member of the Senate Committee on Environment and Public Works says, “The economic analysis of the Obama EPA’s MACT paints a bleak picture for economic recovery as it will cost $11 billion to implement, increase electricity rates for every American, and, along with the Cross-State rule, destroy nearly 1.4 million jobs.”

MACT is all about mercury in the environment of the nation. On May 25, 2011 , the Wall Street Journal published a brief opinion piece by Willie Soon, a natural scientist at Harvard, co-authored by Paul Driessen, a senior policy advisor for the Committee for a Constructive Tomorrow. It was titled “The Myth of Killer Mercury.”

Here are a few of the facts it offered.

“Mercury has always existed naturally in the Earth’s environment. A 2009 study found mercury deposits in Antarctic ice across 650,000 years.”

“Mercury is found in air, water, rocks, soil and trees, which absorb it from the environment.”

There is “200,000,000 tons of mercury naturally present in seawater” that “has never posed a danger to any living thing.”

U.S. forest fires emit at least 44 tons (of mercury) per year; cremation of human remains discharges 26 tons; Chinese power plants eject 400 tons; and volcanoes, subsea vents, geysers and other sources spew out 9,000-10,000 additional tons per year.”

“Since our power plants account for less than 0.5% of all the mercury in the air we breathe, eliminating every milligram of it will do nothing about the other 99.5% in our atmosphere.”

This is the same EPA “logic” that insists on reducing carbon dioxide (CO2) in the atmosphere when all life on Earth depends on it as plant food for all vegetation. More CO2 mean more crops for humans and livestock, healthier forests and jungles, and food for the Earth’s wildlife population.

In a foreword to “Regulators Gone Wild: How the EPA is Ruining American Industry”, Dr. Jay Lehr, the Science Director of The Heartland Institute, wrote, “This administration is pushing an unprecedented radical environmental agenda.”

The EPA, along with major environmental organizations such as the Sierra Club, Friends of the Earth, and others, have engaged for decades in a massive propaganda effort to convince Americans they are imperiled by the nation’s air and water. It is a lie. As the author of “Regulators Gone Wild”, Rich Trzupeck notes, “Though our world is actually cleaner than ever, most Americans are convinced it is dirtier.”

“Toxicity,” wrote Trzupeck, “is a matter of dose, as sober scientists have observed since ancient times. A particular compound may kill you if you drink it, but a few parts per billion of the same compound can have no effect at all…one can find toxic air pollutants in the parts-per-billion level in human breath.”

The EPA’s latest rule, which will no doubt be subject to lawsuits, is a killer MACT. It is not about mercury or other trace gases. It is about deliberately depriving the nation of energy which in turn means less jobs, less growth, and a third world lifestyle being imposed on Americans by the radical environmentalists inside the Obama administration.

Remember that when you are in the election booth on November 6, 2012. (my emphasis)

By Alan Caruba for Facts Not Fantasy

By permission Alan Caruba

Alan Caruba writes a daily post at http://factsnotfantasy.blogspot.com

© Alan Caruba, 2011

Economic Stereotypes Battle for the White House

Posted on January 25th, 2012

One Last Christmas Wish by Rick McKee, The Augusta Chronicle

By Bill Frezza

If a presidential election were held between Gordon Gekko and Saul Alinsky, whom would you vote for?

No, the pending match-up between Mitt Romney and Barack Obama is not a choice between a vulture capitalist and a radical socialist, but you wouldn’t know from listening to partisans tirelessly trying to demonize the opposing candidate.

That doesn’t mean that the nation isn’t truly facing a choice that will dictate how our government deals with money, or the lack thereof. But no matter who wins in November, the pain will not be over. At stake is how long the pain is going to last, and for whom.

The economic meltdown kicked off by the subprime mortgage crisis is not a cause but a symptom of our deeper problems. Even if the housing bubble had ended with a soft landing and the derivatives casino built upon it was unwound without collapse, we would still have to figure out how to finance a government that has made many more promises than it can fulfill. The Great Recession added urgency to this problem-perhaps accelerating the day of reckoning by a decade-but it didn’t create it.

The mismatch between the government’s ability to extract money from its citizens and the promises made to shovel money to various voting constituencies has been in the making for seven decades. Both political parties are responsible. Together they built a warfare/welfare state that has gotten so large that it threatens to swallow the economy, and by doing so shrinking it considerably.

Now two opposing economic visions are being offered from which Americans must choose. The details are still sketchy, but the contours are clear.

President Obama is asking us to follow the example of the European social democracies. His vision requires further enlargement of the role of government, continuing the trajectory of the last few years. His philosophy is anchored in a communitarian view of society in which we are all our brothers’ keepers, empowering government to ensure that all citizens enjoy a minimum standard of living. His goal is to compress the differences between rich and poor by aggressive redistribution designed to maximize economic equality.

Promoters of this vision would have us believe that the government can both finance its existing unfunded liabilities and promise even more benefits to the average voter by extracting ever increasing amounts of money from an ever diminishing sector of the citizenry-the maligned 1%, against whom Obama is fomenting class warfare. They believe that, despite disincentives, the rich will continue producing wealth, handing larger portions over to the government, because, well, that’s what capitalists do.

Economic growth will come from the wise allocation of capital not by profit-seeking private investors, but by government bureaucrats picking winners upon whom to bestow grants, loans, and subsidies. Meanwhile, the government will saddle the “wrong” industries with taxes, regulations, and mandates- raising revenue while shrinking politically incorrect businesses to satisfy an array of social, political, and environmental agendas.

Soon-to-be Republican presidential candidate Mitt Romney is asking us to return to our roots. His vision requires either reducing the role of government, or perhaps merely reducing its rate of growth. It’s hard to tell, as Romney appears to be a technocrat driven by pragmatic results rather than ideology. He imagines a future in which the government learns to live within its means primarily by reducing spending. His vision appears anchored in an individualist ethos in which the government’s role is to ensure equality before the law, not of economic outcome. His goal is to maximize opportunity, even if this leads to economic inequality.

Government will increase revenues not by narrowing the tax base but by broadening it, reducing marginal tax rates for both corporations and individuals while eliminating distorting exemptions and deductions. Capital would be allocated by private investors risking their own money in hopes of earning profits, with the government standing aside. Regulations, mandates, and other encumbrances on business would be reduced or eliminated.

Promoters would have us believe that the ensuing changes in incentives, a reduction in regulatory uncertainty, and a more internationally competitive tax regime will stimulate investment and growth in the private economy. Under the rosy scenario, this growth will be fast enough to outstrip the demographic tsunami threatening to bankrupt the government as Baby Boomers retire and demand to collect on promises made to them. The more likely outcome is that entitlement spending will have to be means tested and cut.

Regardless of who wins the presidency, the House of Representatives will be dominated by restive conservatives working to ensure that the U.S. never goes the way of the European social democracies. They will do their best to roll back key portions of the entitlement state, starting with Obamacare. It is extremely unlikely that either party will win a filibuster-proof 60-seat majority in the Senate, so both parties will retain the power to grind legislation to a halt.

If Romney wins, he will find it a tremendous challenge to govern. With a little luck he may be able to enact some portions of his program. If he does, the pain will be sharp for some, particularly those whose economic well-being depends on an uninterrupted flow of checks from the government. If he succeeds in rekindling significant economic growth it may buy the country some time to get its books in order.

If Obama wins, he will find governing not just hard, but impossible. The ensuing four years will be marked by ceaseless political warfare while the government is left to grow on autopilot. Tax rates will automatically go up across the board as the Bush tax rate cuts expire. The phony across-the-board spending cuts due to kick in in 2013-which were embedded in the last 11th-hour compromise-will be revealed as a fraud. If it survives a court challenge, a crabbed version of Obamacare will roil the private sector as its public components get crippled by lack of funding. Continuing resolutions and debt ceiling theatrics will continue to replace rational budgeting. Maybe the economy will enjoy a brief and anemic recovery and maybe it won’t. Either way, the day of reckoning will draw nearer.

There are, of course, other clear differences between the two presidential candidates and their parties, but the one thing most rational people agree upon is that culture war conflicts are a luxury we cannot afford this election cycle. What difference will it make whether gay marriage is banned or enshrined if the federal government follows Greece, Italy, Spain and the rest of Europe into insolvency?   (my emphasis)

By Bill Frezza for Real Clear Markets

By permission Bill Frezza

www.realclearmarkets.com

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com or follow him on Twitter @BillFrezza.

Bitter And Painful Facts About The Coming Baby Boomer Retirement Crisis

Posted on January 24th, 2012

No Retirement by Mike Keefe, The Denver Post

EDITOR’S COMMENT: While we have discussed this “retirement crisis” many times previously, these comments add some significant insight and should give everyone pause, as to what is really going to happen in the next few years to retirees. As we’ve seen, a very large number of retirees simply have not prepared themselves financially for their retirement. What’s going to happen to them, as it is unlikely that they’ll be able to survive reasonably well on their small Social Security payment.

Even more so, when one finally acknowledges that these small payments may have to be reduced, because of the government’s deficit and debt problems. It’s going to be very painful, not just for these retirees, but also for those who are working, and will be asked to pay even higher taxes to support these future retirement expenses.

By The Economic Collapse

For decades we were warned that when the Baby Boomers started to retire that this country would be facing a retirement crisis of unprecedented magnitude.  Well, that day has arrived ladies and gentlemen. Back on January 1st, the Baby Boomers began to retire and more than 10,000 of them will be retiring every single day for years to come.  Most of them have not saved up nearly enough money for retirement.  At the same time, private sector pension plans are failing all over the place, hundreds of state and local government pension plans from coast to coast are woefully underfunded, and the Social Security system is on the road to complete and total disaster.  A massive wave of humanity is hitting retirement age at a moment in history when the U.S. economy is coming apart at the seams.  We do not have the resources to keep the promises that we made to the Baby Boomers, and most of them have not made adequate preparations for retirement.  What we have is a gigantic mess on our hands, and millions of Baby Boomers are going to find retirement to be very bitter and very painful.

A lot of younger Americans just assume that Social Security is enough to take care of the needs of elderly Americans.  But that is just not the case.

Have you ever tried to live solely on a Social Security check?

It is not easy.  The truth is that those checks are just not that large.

The following comes directly from the Social Security Administration….

The average monthly Social Security benefit for a retired worker was about $1,177 at the beginning of 2011.

Could you live on less than 300 dollars a week?

And keep in mind that the $1,177 monthly figure is just an average.  Many receive a lot less than that.

In addition, Social Security benefits have been seriously squeezed by inflation in recent years.  The cost of food and other basics has risen briskly and Social Security benefits have not.

Today, many elderly Americans have to make a choice between buying food, heating their homes or buying medicine that they need.  They simply do not have enough money to do all of them.

It would have been nice if all of the Baby Boomers had been busy saving money for retirement all these years, but that just did not happen.  In fact, the Baby Boomers as a group are trillions of dollars short of what they need for retirement.

So why doesn’t the U.S. government step in to help them out?

Well, the reality of the situation is that the U.S. government is flat broke.  The federal government is now over 15 trillion dollars in debt.  During the Obama administration so far, the U.S. government has accumulated more new debt than it did from the time that George Washington took office to the time that Bill Clinton took office.

Lawmakers are already looking at ways to make the Social Security program less costly.  No, the federal government is not going to be riding to the rescue.

In fact, it will be a minor miracle if the Social Security program is able to survive until the end of this decade, and it will be a major miracle if the Social Security program is able to survive until 2030.

As for myself, I do not believe that I will ever see a single penny from Social Security, and many other working age Americans feel the same way.

Retirement is supposed to be a fun time, but sadly most Americans that are approaching retirement age are not going to have any “golden years” to look forward to.

Rather, millions of elderly Americans are going to find the years ahead absolutely agonizing as they struggle just to survive.

The following are 25 bitter and painful facts about the coming Baby Boomer retirement crisis that will blow your mind….

  1. According to the Employee Benefit Research Institute, 46 percent of all American workers have less than $10,000 saved for retirement, and 29 percent of all American workers have less than $1,000 saved for retirement.
  2. According to a recent poll conducted by Americans for Secure Retirement, 88 percent of all Americans are worried about “maintaining a comfortable standard of living in retirement“.  Last year, that figure was at 73 percent.
  3. A study conducted by Boston College’s Center for Retirement Research has found that American workers are $6.6 trillion short of what they need to retire comfortably.
  4. Today, one out of every six elderly Americans lives below the federal poverty line.
  5. On January 1st, 2011 the very first Baby Boomers started to retire.  For almost the next 20 years, more than 10,000 Baby Boomers will be retiring every single day.
  6. At the moment, only about 13 percent of all Americans are 65 years of age or older.  By 2030, that number will soar to 18 percent.
  7. Right now, there are somewhere around 40 million senior citizens.  By 2050 that number is projected to increase to 89 million.
  8. Back in 1991, half of all American workers planned to retire before they reached the age of 65.  Today, that number has declined to 23 percent.
  9. According to one recent survey, 74 percent of American workers expect to continue working once they are “retired”.
  10. According to a recent AARP survey of Baby Boomers, 40 percent of them plan to work “until they drop”.
  11. A poll conducted by CESI Debt Solutions found that 56 percent of American retirees still had outstanding debts when they retired.
  12. A study by a law professor at the University of Michigan found that Americans that are 55 years of age or older now account for 20 percent of all bankruptcies in the United States. Back in 2001, they only accounted for 12 percent of all bankruptcies.
  13. Between 1991 and 2007 the number of Americans between the ages of 65 and 74 that filed for bankruptcy rose by a staggering 178 percent.
  14. What is causing most of these bankruptcies among the elderly?  The number one cause is medical bills.  According to a report published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States.  Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved individuals that actually did have health insurance.
  15. Public retirement funds all over the United States are woefully underfunded.  For example, it has been reported that the $33.7 billion Illinois Teachers Retirement System is 61% underfunded and is on the verge of complete collapse.
  16. Most U.S. states have huge pension obligations which threaten to bankrupt them.  For example, pension consultant Girard Miller told California’s Little Hoover Commission that state and local government bodies in the state of California have $325 billion in combined unfunded pension liabilities.  When you break that down, it comes to $22,000 for every single working adult in the state of California.
  17. Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern’s Kellogg School of Management have calculated the combined pension liability for all 50 U.S. states.  What they found was that the 50 states are collectively facing $5.17 trillion in pension obligations, but they only have $1.94 trillion set aside in state pension funds.  That is a difference of 3.2 trillion dollars.  So where in the world is all of that extra money going to come from?
  18. According to the Congressional Budget Office, the Social Security system paid out more in benefits than it received in payroll taxes in 2010.  That was not supposed to happen until at least 2016.  Sadly, in the years ahead these “Social Security deficits” are scheduled to become absolutely nightmarish as hordes of Baby Boomers retire.
  19. In 1950, each retiree’s Social Security benefit was paid for by 16 U.S. workers.  According to new data from the U.S. Bureau of Labor Statistics, there are now only 1.75 full-time private sector workers for each person that is receiving Social Security benefits in the United States.
  20. The U.S. government now says that the Medicare trust fund will run out five years faster than they were projecting just last year.
  21. The total cost of just three federal government programs – the Department of Defense, Social Security and Medicare – exceeded the total amount of taxes brought in during fiscal 2010 by 10 billion dollars.  In the years ahead expenses related to Social Security and Medicare are projected to skyrocket dramatically.
  22. The Pension Benefit Guaranty Corporation is the agency of the federal government that pays monthly retirement benefits to hundreds of thousands of retirees that were covered under defined benefit pension plans that failed.  The retirement crisis has barely even begun and the PBGC is already dead broke.  The PBGC says that it ran a deficit of $26 billion during the fiscal year that just ended and that it will probably need a huge bailout from the federal government.
  23. According to a survey by careerbuilder.com, 36 percent of all Americans say that they don’t contribute anything at all to retirement savings.
  24. More than 30 percent of all investors in the United States that are currently in their sixties have more than 80 percent of their 401k plans invested in equities.  So what is going to happen to them if the stock market crashes?
  25. A survey taken earlier this year found that 20 percent of all U.S. workers admitted that they had postponed their planned retirement age at least once during the last 12 months. Back in 2008, that number was only at 14 percent.

Our politicians should have addressed the retirement crisis decades ago before we got to the point of being in debt up to our eyeballs.

It is being projected that the U.S. national debt will hit 344% of GDP by the year 2050, and the Congressional Budget Office says that U.S. government debt held by the public will reach a staggering 716% of GDP by the year 2080.

Obviously those figures will never be reached because our financial system would totally collapse long before then.

So what do we do?

We have tens of millions of elderly Americans that are completely and totally dependent on Social Security and Medicare, but those programs also threaten to bankrupt us as a nation.

Anyone that believes that there is a “quick fix” to these issues is being naive.

The “supercommittee” was supposed to address this problem, but they failed so spectacularly that they have become a national joke.

Sadly, most of our politicians just keep kicking the can down the road.  They hope that somehow things will just magically “work out”.

Well, the truth is that things are not going to “work out”.  The poverty level among the elderly is going to continue to increase.  Pension plans all over this nation are going to continue to fail in staggering numbers.  Social Security and Medicare are going to bleed more red ink with each passing year.

Something should have been done about this problem a long, long time ago.

But it wasn’t.

This crisis was ignored, dealing with it was put off time after time and all the doomsayers were laughed at.

Now the crisis is here, and we are all going to pay the price.  (my emphasis)

By The Economic Collapse Blog

By permission The Economic Collapse

http://theeconomiccollapseblog.com

What the Next Decade Holds for Commodities

Posted on January 24th, 2012

Gold Ingots_6585623By Frank Holmes. CEO and Chief Investment Officer, U.S. Global Investors

What a decade! A rapidly urbanizing global population driven by tremendous growth in emerging markets has sent commodities on quite a run over the past 10 years. If you annualized the returns since 2002, you find that all 14 commodities are in positive territory.

A precious metal was the best performer but it’s probably not the one you were thinking of. With an impressive 20 percent annualized return, silver is king of the commodity space over the past decade with gold (19 percent annualized) and copper (18 percent annualized) following closely behind.

Notably, all commodities except natural gas outperformed the S&P 500 Index 10-year annualized return of 2.92 percent.

Last year did not seem reflective of the decade-long clamor for commodities. In 2011, only four commodities we track increased: gold (10 percent), oil (8 percent), coal (nearly 6 percent), and corn (nearly 3 percent). The remaining listed on our popular Periodic Table of Commodity Returns fell, with losses ranging from nearly 10 percent for silver to 32 percent for natural gas.

Periodic Table of Commodity ReturnsSource: Bloomberg and U.S. Global Research

I think this chart is a “must-have” for investors and advisors because you can visually see how commodities have fluctuated from year to year. Take natural gas, for example, which posted outstanding increases in 2002 and 2005, but has been a cellar-dweller for the last four years as a result of overabundant supply and softening demand. The industry is also still trying to digest breakthrough technology that opened the door to vast shale deposits at a much lower cost.

On the other hand, oil finished in the top half of the commodity basket six out of the past 10 years. No stranger to volatile price swings, oil possesses much more attractive fundamentals as we continually see restricted supply coupled with rising demand.

After 11 consecutive years of gains, some are questioning whether gold can keep its winning streak alive in 2012. One of those skeptics is CNBC’s “Street Signs” co-host Brian Sullivan. During my appearance on Thursday, I explained how I believe the Fear Trade and Love Trade will continue to fortify gold prices at historically high levels.

One reason the Fear Trade should persist in purchasing gold is the ever-rising government debt across numerous developed countries. During our Outlook 2012 webcast, John Mauldin kidded that the Mayans were not astrologers predicting the end of the world, but economists predicting the end of Europe. Whereas John believes the U.S. has wiggle room to decide on how to deal with deficits and debt, Europe and Japan are running out of time.

The situation is quite somber when you consider how much debt Europe, Japan and U.S. owes this year alone, says global macro research provider Greg Weldon. In his preview of 2012, Weldon says that the maturing principal and interest on U.S. Treasury debt due this year totals just under $3 trillion. Austria, Belgium, France, Germany, Italy, Portugal and Spain together face nearly $2 trillion in principal and interest payments. Japan, is the leader in the clubhouse, owing just over $3 trillion in 2012. With the combined debt for these developed countries totaling nearly $8 trillion, the interest payments alone dwarf the total GDP of many countries in the world.

Developed Countries Owe Nearly $8 Trillion in 2012

Last week, Germany sold a 5-year government note for less than one percent, the lowest interest rate on record. Bids for the low-yielding debt were three times more than the amount sold, even as the consumer price index stands at more than two percent year-over-year. This means that investors have so few acceptable safe havens they are willing to accept negative real rates of returns.

This is good news for gold as a safe haven alternative against depreciating currencies such as the euro, the yen and the U.S. dollar.

The overwhelming debt burden in developed countries translates to an expected slowdown in imports from the emerging world. However, the grandest of those, China, likely won’t be as affected as much as some people assume. This is “the biggest misconception” about the country’s economy, says CLSA’s Andy Rothman. Exports only play a supporting role for the Chinese economy. The world’s second-largest economy is actually largely driven by domestic consumption from a population more than 1 billion strong with more padding in their wallets.

Andy says 10 years of tremendous income growth and little household debt, make China the “world’s best consumption story, for everything from instant noodles to luxury cars” in 2012.

According to December Chinese trade figures, month-over-month and year-over-year imports of aluminum and copper increased significantly. This may be a result of China restocking ahead of Chinese New Year, but M2 money supply growth rapidly rose in recent months, a sign the government is attempting to reaccelerate the economy. Also, the urban labor market has been robust over the past two years, with an annual change just below 5 percent – a record high over the past 15 years.

China Still Experiencing Strong Growth Momentum

Along with rising urban employment, income growth has been tremendous as well. CLSA says that last year was “the eleventh consecutive year of 7 percent-plus real urban income growth,” with disposable incomes rising 152 percent over the past decade.

Investors shouldn’t expect China’s growth to be as robust as it’s been, as the country’s fixed asset investment growth drops below the 25 percent year-over-year pace of the last nine years, says CLSA. China’s 12th Five-Year Plan has less infrastructure spending compared to the 11th Five-Year plan. Transport and rail spending is also expected to drop, with only water and environmental protection spending growth rising.

As shown in the BCA chart above, GDP growth has declined below 10 percent, but the growth is currently not the lowest we’ve seen in recent years. CLSA believes that China will prevent GDP growth from slipping below 8.5 percent for the full year, as “Beijing has the fiscal resources and political will to quickly implement a much larger stimulus.”

Judging by the record number of articles mentioning a hard landing in China in late 2011, investor sentiment has swung from euphoria to excessive pessimism, according to BCA Research. Last fall, more than 1,000 articles discussed the risk of a “China Crash.”

Number of Articles Discussing the Potential of China's Hard Landing

As I’ve mentioned before, contrarians view extremely bearish sentiment as a potential attractive entry point. BCA believes the pessimism has been priced in, as technical indicators as well as valuations for domestic and investable markets appear “deeply depressed.”

What will happen over the next 10 years? I believe the supercycle of growth across emerging markets will continue with rising urbanization and income rates. This bodes well for commodities, especially copper, coal, oil and gold, and we’ll continue to focus on companies that will benefit the most from these much-needed resources. (my emphasis)

By Frank Holmes. CEO and Chief Investment Officer, U.S. Global Investors

By permission Frank Holmes

www.usfunds.com

The U.S. Is on a Suicide Watch

Posted on January 24th, 2012

Obama Raising the Debt

By Alan Caruba

In 1991, the Soviet Union, arguably the greatest experiment in Communism, collapsed. After Mao Zedong died in 1976, his successors moved to shift its Communist economy to one that embraced Capitalism while retaining centralized government control.

Following World War Two, the recovering nations of Europe were rescued from Communism by the Marshall Plan, but adopted Communism-Light in the form of Socialism. The U.S. was already headed in that direction, creating programs that we now call “entitlements.” For most of the nation’s history, such “entitlements” did not exist.

What binds together the financial problems of the West is the common thread of infantile behavior and thought. One might call it wishful thinking. Instead of encouraging people to provide for old age and possible illness, politicians decided to turn government into Big Daddy, the eternal source of money for everything.

Need to go to college, start a business, or plan for retirement? Government would be there to help. All this ignored the need to actually pay for these programs. In the case of Social Security Congress began to dip into its funding to pay for other programs! This is what children do.

One can look around the world and see what a failure both Communism and Socialism have been. Governments spending more than their tax and other revenues have suffered grievously from this path to default, and that includes the United States of America. It can be argued that, with few exceptions–the Reagan years come to mind—Presidents have been poorly served by their economic advisors.

Politicians make poor economists because, in America, members of the House must think of getting reelected every two years and Senators every six. Moreover, being politicians, they believe that the more federal largess they can bring back to their State and then brag about is the one true path to reelection.

At the very beginning of the nation, Thomas Jefferson said it best. “I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”

How many commissions and special committees have earnestly produced reports intended to deal with a government grown too large? At the federal level, some two million or more Americans are employed promulgating a deluge of regulations and pushing paper.

Now President Obama says he wants to streamline the federal government.

The real issue is not “streamlining” government agencies by gathering them together under one roof and one administrator, but the failure to end government departments and agencies that no longer serve a useful purpose and whose removal would also remove countless obstacles to economic growth.

In April 2011, Wayne Crews of the Competitive Enterprise Institute warned that “the federal government is on track to spend more than $3.5 trillion this year. What most people don’t know is that government actually costs about 50% more than what it spends. That’s because complying with federal regulations costs an additional $1.75 trillion—nearly an eighth of GDP. And almost none of that cost appears on the budget.”

The United States of America, the greatest engine of wealth the world has ever seen, is bankrupt. The national debt exceeds the Gross Domestic Product, the sum total of all revenue generated by goods and services.

The President has asked that the debt ceiling be raised another trillion or so and Congress will comply. That, I submit, is insane.

I also submit that, since Barack Obama was sworn into office on January 20, 2009, the nation has been witness to the economic insanity personified in the man and in the Democrat-controlled Congress that was his partner until 2010 when the control of the House of Representatives was wrested away by the Tea Party movement and its support for Republican candidates.

The only constant in life is change. America’s demography has changed. We have, thanks to medical care and other advantages, a much older segment of the population than ever before, but the nation from the 1930s to the 1960s had committed itself to ensure they would have Medicare and Medicaid at a time when people more often than not died in their 50’s and 60’s. We now have an average life expectancy of 78 years. My parents lived into their 90s.

Politics, not economics, continues to make it impossible to revise and restructure both Medicare and Social Security to reflect this reality. Instead, we had Obamacare foisted upon us which took trillions from Medicare and imposes rules that will let elderly heart attack or stroke victims die rather than pay for a level of care to which they contributed during their working years.

If the Supreme Court declares Obamacare unconstitutional it will go away. If we elect a Republican Senate, the repeal already passed in the House will be passed and it will go away.

But America’s economic problems will not go away until Americans insist that the shackles of Big Government be cut loose to enable the growth of an energy industry that can not only make the nation energy independent, but produce billions in revenue as far as the eye can see into the future.

The tax system with its thousands of pages must be revised to a simpler, fairer program. It makes no sense that forty percent of Americans pay no taxes at all.

It’s not that we don’t know what must be done. Conservative think tanks like The Heritage Foundation, the Cato Institute, The Heartland Institute, the Competitive Enterprise Institute, and others have spelled out programs that can and will save America, but the nation must be led by a president who understands that Capitalism involves budgeting, planning, hard work, and—yes—risk.

The federal government is running on “continuing resolutions.” It has not had a formal budget since Obama arrived. This is no way to run the greatest nation on the face of the Earth. America is on a suicide watch and we are just an election away from saving it. (my emphasis) 

By Alan Caruba for Facts Not Fantasy

By permission Alan Caruba

Alan Caruba writes a daily post at http://factsnotfantasy.blogspot.com

© Alan Caruba, 2011

Why Even Rich Kids Could Soon Be Part of the 99%

Posted on January 23rd, 2012

Protester Leaving Home by Gary McCoy, Cagle Cartoons

Even well-off recent graduates are finding their liberal arts degrees don’t hold much promise. And these days, mom and dad may not be much help.

By Steve Reynolds

It was a warmer than normal winter day in New York City, and Ethan was dressed lightly in low-slung Levis, baggy sweater, and flimsy windbreaker. The ends of his matted hair protruded stiffly from a tightly bound bandana. All were soiled and unkempt. As he entered 927 Fifth Avenue, the doorman, upon regaining his composure, wished him, “Merry Christmas!”

It had been three long years since he was graduated from Amherst College with a dual major in art history and philosophy. He had average grades, living off-campus with limited involvement in “Herst” activities. His expectations had been to land an entry-level marketing position at a major media company or training slot at a money center bank. Drained by endless applications and rejections, he had become disillusioned about his prospects and the “system.” Out of frustration, he joined the ranks of Occupy Wall Street. After months of “camping,” he had come home for a hot shower, hearty meal, and the warmth of his biological family. On the last, he had trepidations.

Ethan’s dilemma was, in part, the result of what Karl Marx referred to as the misery of the proletariat. This theory predicted that as capitalism matured, businesses, in search of higher productivity, would replace labor with capital. Wages would be suppressed and unemployment would rise. Today, as we relish the rewards of rapidly advancing technology and grapple with the effects of globalization, are we just beginning to understand the collateral damage?

The unhappy camper’s affiliation with the “99 percenters” was not driven by a desire to save the whales, fear of global warming, love for the Dalai Lama, fight for abortion rights, or gay pride. Ethan felt the concerns over income inequality were logically flawed and overblown, but was incensed that the CEOs of the five largest banks were not sharing “office space” with Jeffrey Skilling and Dennis Kozlowski. His protestation against the system was more about his fear of permanent displacement from productive society. Was Ethan one of the victims of technological change?

As the elevator rose toward the 11th floor, he was anxious about seeing his father. Alexander was a well-respected hedge fund manager, who as the result of 15 years of adept stock picking had amassed reasonable wealth and a rock-star reputation. Recent years, however, had been unsettling. The partnership incurred losses in the 2008 financial meltdown, but, as the result of the market recovery, it entered 2011 moderately above its high-water mark. After three years of no carried interest, there was hope for better returns and more prosperous times. But he, like his son, was anxious. He sensed that markets were different. His time-tested, fundamental investment process was not working. He also felt confused and disconnected.

Alexander was frustrated by the impact of new investment technologies on stock market dynamics. High-frequency trading, black-box models, complex derivative strategies, and exchange-traded funds were dominating market behavior. The quants with their Ph.D.s in mathematics were running roughshod over the practitioners of Graham and Dodd. Stocks of individual companies had become CUSIPs, symbol-less commodities.

The resultant internal structure of the equity market had become abnormal. Despite strong earnings growth and extremely low interest rates, the valuation on the S&P 500 Index was only slightly over 12 times. With the majority of stocks moving in tandem, the correlation, within the equity market, was near a record high. There was a compression of valuations. Rather than a broad range of price-earnings multiples determined by growth prospects, stocks were clustered around the market multiple with a historically narrow dispersion. Heightened anxiety was causing an elevated level of directionless, schizophrenic price volatility.

As a result, 2011 was a stock picker’s nightmare. The ability to extract a positive alpha was extremely difficult, as demonstrated by Alexander and his hedge fund peers’ delivery of double-digit negative returns in a moderately rising market. Their skills were becoming obsolete. Were they also becoming victims of technological change? Might Karl’s namesake Groucho have called this phenomenon, the misery of the alpha-bettors?

Are the father’s and son’s miseries transient or long-lasting? As a humanities graduate who coasted with average grades, Ethan does not have rosy prospects in the private sector. With the public sector budgets under pressure, “safety” jobs are also more difficult to secure. The unemployment rate for aspirants with a liberal arts background is in the high teens. In contrast, recent graduates in science, technology, engineering, and mathematics are almost fully employed.

For Alexander — if he embraces the proper investment strategy — the prognosis is more promising. The current abnormalities in the equity market are only partly due to the influence of “financial” technology. Also contributing are the heightened macro uncertainties surrounding Europe, China, Korea, Iran and the Middle East, and US politics, to name a few. Any lessening of these concerns would contribute to a return toward a more normal market structure.

Fortunately, the issues most relevant to US investors are likely to improve. Stabilization of the European financial system seems to be gaining traction. The initiation of stimulative monetary and fiscal policies in the emerging/industrializing world is anticipated in early 2012. By the November elections, American politics may become more centrist, embracing a friendlier business climate. As these transpire, a stair-step, three-legged market advance should result.

This outcome would entail a modest improvement in the market multiple (better valuations), greater differentiation in the valuations between good and not-so-good companies (less P/E compression), individual stocks acting independently in response to external variables (lower correlation), and less frenetic news-oriented trading (reduced volatility). This environment, while friendly to Alexander’s alpha crowd, would still pose many daunting challenges.

In the US, the prospects for 2012 are for the continuation of the moderate, “square-root” shaped recovery with slowing profit growth as domestic margins peak and foreign subsidiaries struggle. The percentage of companies beating expectations will decline dramatically. Investors’ attention will narrow to those companies that can demonstrate well above-average, organic revenue growth, translated into rapidly rising earnings per share. Their stocks will benefit from the powerful combination of rising earnings and P/E multiples. The investment theme will be democratic, embracing growth companies in all industries and market capitalizations. This favored group of stocks will be designated, in faint praise of the 1968-1973 growth stock mania, as “The Nifty 250.”

As the inefficiencies of the market diminish and the P/E compression abates, the multiple expansions will be most beneficial to growth stocks.  As an example, if the overall stock market moves over the next few years from its current multiple of 12 times back to a more normal 15 times, the result would be a 25% gain for the S&P 500 Index. If at the same time mispriced growth stocks’ multiples expand from 12 times to 20 times, that would provide 67% appreciation. This froth will be the fodder of the next market bubble.

This evolving bifurcated market will result in momentum investors dominating the lists of best performing managers. Value investors will be ensnared in value traps, GARPists befuddled by unreasonable prices, traditional growth managers perplexed by high price-earnings-to-growth ratios, and multifactor managers frustrated by a lack of focus. While the overall stock market averages will move ahead, most investors will be left behind. Portfolio manager misery will be prevalent.

Unexpectedly, the Christmas dinner and homecoming went well. Alexander and his son enjoyed each other’s company. Both, a bit humbled by their respective “disconnects” with their rapidly changing worlds, were conciliatory, finding solace in shared anxieties. Ethan entered the elevator with a new winter coat, a parcel of dinner leftovers, and a one-year extension of his allowance, but with no viable plan. His father returned to the den, settled in front of the fire and opened to page one in the bible on growth stock investing: Philip Fisher’s Common Stocks and Uncommon Profits.   (my emphasis)

By Steve Reynolds for Minyanville

By permission Minyanville

www.minyanville.com

Precious Metals Stocks: Diversify, Seriously

Posted on January 23rd, 2012

Stacked Gold BarsBy John Rubino

Gold and silver mining stocks will be the dot-coms of the second half of this decade. Yet most of the people who bet on them will lose money because they ignore the first rule of speculative sectors, which is that no matter how well the sector does, most of its constituent companies will fail.

This rule applies wherever hot money is chasing untested concepts, but it’s uniquely valid for mining, where reserves are uncertain until actually dug up, mines can cave in without warning, local laws can change in unfavorable ways, and managements frequently make dumb acquisitions. These risks make even the most attractive mine something of a crapshoot. Two recent examples:

Hecla’s Hangover
January 11, 201. Hecla already had a headache, but now it’s suffering from a full-blown hangover.

The series of unfortunate incidents that plagued Hecla Mining’s (NYSE: HL ) mile-deep Lucky Friday mine during 2011 attracted the scrutiny of the Mine Safety and Health Administration, which has now ordered the mine’s primary shaft closed until it can be cleared of debris that has accumulated over the years. Hecla estimates that the maintenance work will keep the mine shut through early 2013, leaving embattled silver investors to wonder whether someone spiked their holiday eggnog.

Hecla shares plummeted by more than 26% this morning, essentially mirroring a 26% reduction in the miner’s 2012 production outlook from 9.5 million ounces to 7 million ounces. Despite a strong price environment that saw the average price of silver in 2011 surge by 74% over the prior-year average, Hecla’s stock has lost some 54% of its value over the past 12 months. Though shareholders may wish to avert their eyes, the following image captures the devastation:

Hecla Mining Chart


Kinross in Play After Paying Too Much for African Gold

Jan. 20 (Bloomberg) — By paying too much for acquisitions in western Africa, Kinross Gold Corp. is now turning itself into the cheapest gold-mining target in the world.

Kinross, Canada’s third-largest gold producer, fell the most in almost two decades after saying this week it will write down the value of its Tasiast mine in Mauritania. The company sold for 76 cents per dollar of net assets yesterday, versus the industry median of 2.5 times, according to data compiled by Bloomberg. Writing off the excess $4.6 billion it spent on Tasiast would still leave Kinross at a 50 percent discount to its competitors, the data show.

Kinross Gold Corporation Chart

Hecla and Kinross are big companies which have been around forever, and they still hit common speed bumps. They’ll both survive, though, which is more than can be said for some junior miners with similar problems. Without money in the bank or other projects to share the load, an operating or cash flow problem can be fatal for a junior.

So why bother with mining stocks when you can just buy the metals? Because in the aggregate mining stocks will probably outperform the underlying metals (the fact that they haven’t lately just means they’ll outperform by an even bigger margin in the future), and the best miners will do two or three times as well as the metals.

So consider them, but show them some respect. Don’t buy just one, no matter how much of sure thing your broker or brother-in-law says it is. Instead, buy five or eight or ten, even if it means owning just a few shares of each. Or buy a mutual fund or ETF and let them do the diversifying for you. GDX holds a basket of major gold miners, GDXJ a basket of junior gold miners, and SIL most of the silver miners. One transaction and you own the sector.

The sector, of course, contains winners and losers, so the real prize goes to whoever has more of the former than latter. As mining guru Rick Rule likes to say, most junior miners aren’t viable, so all the gains in that sector come from the remaining 10 or 20 percent. So if you really want to be part of the coming mania you have to be a stock picker.

One low-stress way to do this is to piggy-back on the work of established analysts. They’re not always right but they do spend their days trying to separate solid properties from holes in the ground guarded by liars. Their best ideas go first to subscribers and/or investors, but they can’t keep everything to themselves. In media interviews, mining experts like Sprott’s John Embry frequently name a few of their favorites, and the funds managed by people like Tocqueville’s John Hathaway are required to report what they’re buying and selling. Once that information is public, it’s fair game.

Last but not least, keep some free cash available for opportunities like Kinross and Hecla, which are now takeover candidates. (my emphasis)

By John Rubino for Dollar Collapse

By permission John Rubino

http://dollarcollapse.com

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