Boomer Market Advisor

The bumpy road to new normal

It’s hard not to be impressed by Mohamed El-Erian. Stepping into Bill Gross’s considerably large shoes (ahem) at Pimco during the most difficult financial period in modern times is one thing. Capably maneuvering the company so it’s the only one of the top 25 fund shops to experience net inflows is another (OK, so it’s a bond shop, but still …). His periodic commentary in Financial Times is a must read, and this week he doesn’t disappoint. He poses a simple question few are asking: What happens if unemployment (currently at 9.5 percent) stays above 10 percent for an extended period? As El-Erian notes, disruptions in our economy until now have been mainly influenced by large-scale anomalies in the financial system. But double-digit unemployment is a large and very angry black swan, and the reactionary policy implications (protectionism, another round of stimulus) aren’t promising.

“Think of this [unemployment] as yet another illustration of the fact that the US economy is on a bumpy journey to a new normal. The longer this reality is denied, the greater will be the cost to society of restoring economic stability.”

Amen to that. But whose reality is he referring to? I should point to the fairly obvious fact that the President’s definition of the new normal (and his resulting policy moves) is far different from those of El-Erian (and many of the rest of us).
 

Low energy ideas

“You never want a serious crisis to go to waste.” So said Rahm Emanuel, the President’s chief-of-staff, and boy did he mean it. Energy reform is the latest mountain the administration and Congress is attempting to move. No matter that they’ll sacrifice the largest demographic in human history in order to do so.

“It looks as if the Democrats will have to destroy the discipline of economics to get it done,” the Wall Street Journal notes of the latest cap and trade push. “[The] bill will impose crushing costs on businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.”

A deconstruction of the cap and trade argument can be found here. But with so little time for boomers to re-accumulate assets before retirement, is now really the best time to be saddling the economy with additional tax, thereby slowing its recovery? Any piece of legislation is subject to CBO analysis of the benefits and costs. Their conclusions are questionable at best, and the tortured methodology they employed suggests a predetermined outcome in need of support material, however skewed. Ironically, baby boomers overwhelmingly supported and voted for Obama, the man I believe (in all seriousness) will ultimately be most responsible for their inability to make it back.
 

The unbearable lightness of being

I feel like Norman Fell.

T.V.’s Mr. Roper had a scene-stealer with Bob Newhart in the film adaptation of Catch-22. Fell’s Sgt. Towser takes such a mixed-up, impossible-to-believe direction from his superior officer played by Newhart that the scene, and Fell’s reaction, is a celluloid classic. My wife said I had pretty much the same look as I read the President’s comments that he “aspires to a light touch” with the economy. Okay, so the Fell analogy is a stretch, but the absolute absurdity of what we’re being asked to believe can’t go unremarked.

Gerald Seib’s interview with Obama in the Wall Street Journal is a must read for those who (like myself) can’t get enough of the hubris and chutzpah of the beltway crowd. The man who “aspires to a light touch” had just announced the most sweeping overhaul to our financial system in 80 years. He’ll give more power to the Federal Reserve, and (more shockingly) reverse individual state insurance regulation in favor of his proposed National Office of Insurance. Never mind regulation at the state level has been in place since the Civil War. He’s about to nationalize the health care sector (one-seventh of our economy), whatever he might claim about private vs. public options. He already runs the auto industry. And Rahm Emanuel, his charming chief of staff, is in the process of ginning a plan for energy, to be ready by summer’s end.

Catch-22 is now a familiar term in our pop culture lexicon, so much so that it’s found in the Merriam-Webster dictionary, “a measure or policy whose effect is the opposite of what was intended.” Be sure to remember this whenever the administration prattles on about its light touch.
 

Make me laugh, funnyman

If you caught The Daily Show a few nights back, you saw economist Peter Schiff make the same case we’ve been making since the election (only in a funnier and more coherent sort of way).

“The President said if you’re about to go over a cliff, it’s wise to change direction,” Schiff told host Jon Stewart. “Not only is he not changing direction, he’s stepping on the gas to reach the cliff that much faster.”

Stewart played clips of Schiff’s various television appearances over the past two years, where Schiff warned of the unprecedented bear market to come. Ben Stein, the CNBC hosts and others dismissively chuckled at Schiff’s predications, with Stein telling Schiff he was “flat out wrong.”

I’m a broken record, and I don’t care. If what the Bush Administration did was so wrong, how does increasing their actions exponentially (as the Obama administration is doing) suddenly make it right? I have yet to hear a convincing rebuttal to this glaringly obvious contradiction. The same friends that go red-faced with rage at the mere mention of Bush and his domestic policies now dismiss Obama’s hypocrisy as “that’s how it’s done in Washington,” as if that somehow makes it better. The latest flim/flam, flip/flop has to do with the so-called “pay as you go” government accounting method, which The Wall Street Journal notes the President flipped, then flopped, then flipped and has now flopped again. Simply put, pay-go means for every government dollar spent, another government dollar in another area must be saved. Of course, the President is now (once again) for it. What isn’t said is that Obama want’s it to apply only to new government programs. So after the largest spending spree in American history (and I include World War II in this figure), Obama is now preaching fiscal discipline. Only one thing to say; gimme a break.
 

So much for civilized debate

Saw Karl Rove debate General Wesley Clark at the TD Ameritrade conference. A raucous affair, to say the least. Catcalls from the crowd, audience members yelling at one another and at one point Rove referring to Clark as Private Clark (not fond of Clark, but I didn’t appreciate the disrespect shown the former military man). So much for civilized debate. Clark stuck to platitudes; Rove, forced to defend the past eight years and his role in it, came with facts. Even my very liberal friend sitting next to me said Rove won the day.

I thought of this as I read Rove’s piece in today’s Wall Street Journal. Picking up on the Ragin’ Cajun Carville’s theme, he makes a strong case that, despite attempts to apologize to the world for who we are and what we stand for, Obama’s fortunes will rise and fall with the economy. I’m not so sure. Bush’s legacy was squarely fixed on Iraq. Then the economy tanked. Looks like we’ll pull a victory out of Iraq, and Bush’s post-presidency approval rating now collapses under economic weight. For the time being, Rove is right, all eyes are on the economy. But recent history has taught us the black swan flies fast and frequent.

One other interesting point. Writing on The New York Times’s Economix blog, Peter Boone and Simon Johnson note the following:

“A superpower faces serious economic decline. People become increasingly nervous about the government’s ability to make good on its obligations, and the country’s broader global role comes into question … Into this difficult situation steps a dynamic young leader, with strong popular support, high expectations, and a positive international image. His name is Mikhail Gorbachev, and the moment is the Soviet Union in 1985.”

Stick with me here. I’m not making the case Obama is the equivalent of a Soviet Premier. As Boone and Johnson point out, Gorbachev did exactly the wrong thing. He borrowed abroad, printed money to finance budget deficits and declined to undertake fundamental reform.

“You know how that ends. President Obama’s team has successfully halted what could have been a major financial meltdown, primarily through a combination of sensible fiscal stimulus and a huge amount of unconditional support for the banking system. The risk is they will rest on this success, and fail to undertake the fundamental reform that we now need.”

In the darkest days in Iraq, too many said the cause was lost, but look where we are today. Too many said, and continue to say, the same about the economy. This too shall pass, and with the speed at which new events are unfolding, Obama's legacy will be shaped by those yet to occur.

Duck and cover democrats

They just don’t get it. I know; I’m beginning to sound like an old crank waving his fist and yelling at the damn kids to get off his lawn. But by “they” I mean politicos across the spectrum, left to right, Republican, Democrat, those in power in 1978, 1998 or 2008. They’re all responsible (along with many others) for the mess in which we know find ourselves, driven by high returns and higher poll numbers. The latest attempt at duck and cover comes from … well, the king of duck and cover. The New York Times David Leonhardt’s Economix blog tracks an interview with Bill Clinton on his financial legacy. And, while I don’t agree with much of the color commentary Leonhardt provides, the opening sequence is especially damning for the former Pres. Important stuff, since it’s especially important to get on record who said and did what when, and what they’re saying and doing now.

Mr. CLINTON: I don’t know if I would have done anything different. I do not believe this would have happened in this way if I had been in office or if Al Gore had been elected. I just don’t. I think we would have caught the housing bubble and taken steps to stem it before it got out of hand [emphasis mine]. And I know that having Arthur Levitt at the Securities and Exchange Commission would have made a huge difference.

ECONOMIX: This is a reasonable argument. But is there tangible evidence in its favor? Were there instances in which Mr. Levitt — or other Clinton advisers, like Timothy Geithner, Robert Rubin, Gene Sperling, Lawrence Summers and Laura Tyson — put a stop to financial excesses in the 1990s? … Alan Greenspan would still have been at the Federal Reserve and, in all likelihood, still been influential with the White House. Mr. Geithner did not stop the buildup in Wall Street leverage that has turned out to be so damaging. Mr. Summers issued warnings about the financial crisis before many others, but he did not issue them, at least not very loudly, in 2005, 2006 or even into 2007.

I love the recession rouge gallery Leonhardt lists – Summers, Geithner and especially Rubin. How relying on the advice of someone at the center of the Citi implosion would have avoided disaster is beyond me, but Clinton’s reasoning of a host of issues is very often “beyond me.”
 

The Beltway bait and switch

A simple lesson too many politicians have yet to learn; companies don’t pay taxes, consumers do. Any tax increase in the corporate rate is passed right along to me and you. That’s why my bar tab grows higher (it has nothing to do with the gallons of beer consumed). The barkeep, my version of Moe Szyslak, essentially hands me the government bill. It makes the product more expensive for the end-user, and they consume less. Great, we can argue, with alcohol. With life insurance? Not so much. But the latest attempt by the President to make us pay our way out of this mess targets the life insurance sector. According to the Wall Street Journal, Obama’s looking for $12.8 billion in new tax revenue from life insurers over the next decade, even as the federal government offers the struggling sector bailout funds. Makes sense, don’t it?

“Especially during a financial and economic downturn, increasing taxes on products and on an industry that encourages American consumers and businesses to plan for the future and effectively manage risk is unwise public policy," the American Council of Life Insurers and the Association for Advanced Life Underwriting said in a joint statement. That’s putting it mildly.

The proposal’s supporters note the brunt of the impact will be felt in COLI business, and they’re just looking to close an unfair tax loophole. Fine, but color me skeptical of Washington do-gooders and their fairness claims. I see unintended consequences rearing their ugly heads in a big, big way. And this is really more of the Beltway bait and switch. Promise middle-class income tax cuts, and raise them everywhere else. And who really pays in the end?
 

(In)sure to fail

Seems now most agree the Bush Administration did — or at least tried to do — something right. Their attempt in 2005 to reform “the third rail of American politics” left them bruised and battered and was quickly engulfed by Hurricane Katrina. But Tuesday’s release of Social Security’s balance sheet has it on the front burner once more. MFS Chairman Bob Pozen, who despite being a Democrat worked on Bush’s proposal, said it’s a second term issue for any president because of the inherent re-election risks. I’m not so sure. Insolvency dates are fast approaching, aided by the current crisis. From U.S. News & World Report:

“Social Security and Medicare's annual checkup revealed that the recession and longer life expectancies are taxing the health of the entitlement system. The Social Security Board of Trustees report found that program costs will exceed tax revenues in 2016, a year sooner than predicted in last year's report. The trust fund will be exhausted in 2037, four years sooner than the 2008 estimate.”

Karl Rove said he had Democratic Party leaders in his office and they agreed the plan put forth would solve the funding problem, but there was no way they were going to give Bush the win — especially on a pillar (the pillar?) of the New Deal. So much for bipartisanship. And the problem, as we saw Tuesday, only grows worse.

Give a drug addict heroin

So much of what the administration rails about as causing the current crisis is exactly what they’re now hailing as its solution. According to this wisdom, banks should lower rates and lend more, and credit card companies should do the same. Richard Posner rightly notes in today’s Wall Street Journal that the Fed preaches fiscal discipline while being the most undisciplined of all. It reminds me of the argument for government-funded methadone for addicts; that somehow this will make the situation better.

Despite screaming headlines and a daily roster of bad news, accountability, either in the government or the private sector, has yet to really occur. And a big part of that is the administration’s stance on stimulus, Fed policy, who survives and who doesn’t (Detroit and other politically connected friends in many cases), which, as we expected, is only prolonging the reckoning that will (and should) come. It’s been beaten to death, but so what, I’m going to beat harder; for all the President’s talk of change, his policies and the behavior they encourage are exactly the same.
 

Maybe now we'll find Jimmy Hoffa

Call it the return of big labor. I read with interest a post by John Kay in the Financial Times about how labour’s (Brit spelling) love affair with big business got us into this mess. Of course, being the ugly American, it took me a few lines to realize he’s referring to the Labour Party. Democrats in this country could never be accused of the same thing — until now.

Despite dismal private sector membership numbers for decades, unions are more powerful than ever. Word comes that U.S. Government and the United Auto Workers will have a combined 90 percent stake in General Motors. Granted the UAW will have a minority stake — only 40 percent. But it gets better with Chrysler, where they’ll own 55 percent. According to the Wall Street Journal, there is nothing in the current union contracts that demands, or requires, this kind of largesse. Apparently, it’s the Administration’s gift to its loyal supporters. What about mutual funds, pensions, individual investors who purchased company bonds? Forget it.

Can anyone explain to me how this will re-attract private investment to this, or any other, industry deemed in trouble? It won’t, and maybe that’s the point. Anyone still believe elections don’t matter?