While Im not exactly a social butterfly and with some groups hereabouts, my views make me something of a social outcast thanks to my far more charming wife, we do get invited to several parties around this time of year. Which, of course, I use to take an informal survey on the state of the economy.
This year my informal survey of the party circuit presents something of a mixed bag, though almost none of my business acquaintances provide an unabashedly enthusiastic report. Instead, the reviews tend to be couched in comparative terms with the recent depths. As in, Well, things are bit better. Or, Were seeing some pick-up. But, no question, its not quite the disaster it was.
Which is what one would expect, given the unprecedented infusion of money into the economy over the last couple of years.
The new year looms large in its importance to everyone I spoke to. Because everyone recognizes that in 2010, the jury will almost certainly return its verdict on whether the global economy can strengthen its tenuous grip on recovery, or lose that grip and tumble back into the abyss.
That the jury is still very much out was confirmed to me when a serious money manager friend of mine revealed that he is almost entirely in cash and has next to no idea what to do with that cash.
Bonds? Not hardly. Not with the near certainty that interest rates are heading higher, under almost any conceivable scenario. If the monetary inflation begins to bear fruit in the form of rising prices, rates are going higher in a hurry. Likewise, if the economy stumbles, the combination of rising default risk and a further layering-on by the government of yet more stimulus, with an increasing share of same outright monetized, that will also send bond yields higher and prices lower.
So, bonds are pretty much a lose-lose proposition at this point. Given that this is a huge market on the order of $80 trillion globally, about twice the size of the equity markets a bad year for bonds is a bad year indeed.
Stocks? Unlike bonds, which tend to move in concert based on the interest rate environment, it is usually a mistake to look at stocks in the aggregate. Thats because if you look hard enough, you can usually find a compelling value, or a sector that is unloved and due for an upward rotation. That said, as you can see from the chart here, based on trailing 12 months earnings through 3rd Quarter 2009, the P/E ratio of the S&P 500 at 74.68 (using current price) is not cheap.
Even so, shoveling hundreds of billions of freshly minted dollars into the economy in 2010, as is the clear intention of Team Obama, could help the broader market hold its own over the course of the year ahead. Of course, you have to expect sharp sell-offs as Mr. Market periodically glances about and, like a giant ground hog, notes that its not yet safe to come out of his hole because of the large shadow of economic hurt hanging overhead.
So, the watchwords for the year ahead have to be caution and careful selection.
Commodities? I think you know how we come down on this asset class. The industrial commodities had a tremendous run-up in 2009 and are likely to run into turbulence should a second leg down for the global economy materialize in 2010. Our view on the precious metals is far more sanguine, for much the same reason we are negative on bonds. Namely, should a real recovery materialize, it will unleash the price inflation we see as inevitable; once banks, businesses, and people come to feel they have enough cash, theyll begin lending and spending again in earnest. Conversely, another whack up the side of the head of the economy will have governments scrambling to apply thick plasters to where it hurts plasters made up of yet more fiat money. The market will see these actions as further evidence that the government is sticking to its current inflationary course, damn the torpedoes and damn the inflation.
So, precious metals still seem a win-win to us.
A year from now, when we look back at 2010, well find any number of adjectives to describe the year, but I sincerely doubt uninteresting will be one. Keep your head down and your powder dry.
Hello, Health Care Goodbye, Dollar
One of my cocktail chats was with an older woman who is a staunch supporter of the current president. For good reasons, I am forbidden to broach politics at these affairs but I am able to pipe up if someone kicks the ball in my direction, which this individual did by saying, Im almost afraid to ask, but what do you think about the job that President Obama is doing?
Rather than launch into a dissertation, I turned the question around and asked her how she thought the big O was doing.
Oh, hes doing fine.
And what has he accomplished? I asked.
A lot, she said, health care, for example.
Interesting, I opined, because what I see is that all we are going to get is a mish-mash of new taxes and regulations designed to avoid stepping on the toes of any important lobbying groups. Which is to say, just a big, slimy hairball of new bureaucracy that doesnt really benefit anyone.
Well, yes, she admitted, it does seem a little convoluted.
You know, I added, because I believe it to be the case, but if my fellow Americans in this great democracy have decided that they want free health care for all, which I disagree with, then they should have it. But the government should have then cast an eye around the world for the best of the worst universal coverage plans and set about implementing that hopefully with some American improvements. Instead, they did the classic political hyena feast with everyone tearing at the legislation, snarling when any other politicians approached the meat of a favored political donor, with the net result being a gruesome carcass that will do nothing but stink up the place.
Or words to that effect, though I hope I didnt mix my metaphors quite so badly.
Even my companion in the casual cocktail chat had to agree with me that the new health insurance plan now speeding its way into law leaves much to be desired but she could have just been humoring me, given that she was edging away to a safe distance even as she concurred.
That plan, however, is now expected to cost a smooth $1 trillion over 10 years, adding another $100 billion a year in government spending.
If I had the time, I could pick apart the economics behind the plan, but as American Thinker has already done so, I will link off to their analysis.
I would share one worthy quote, though, as to how the government is trying to rationalize the spending.
You get deficit reduction by cutting Medicare and raising taxes by more than $1 trillion: Medicare and other program cuts of $483 billion, and an extra $521 billion in new taxes and fees.
But as our own Bud Conrad points out rather skeptically, I thought the odds of the government actually getting around to cutting Medicare and other programs by $483 billion are pretty slim. Therefore, its almost a sure thing that the financial outcome of this new mega-legislation will be far, far worse than the government says it will be.
Time for Some Clarification?
Ever since the U.S. government invaded Panama and whisked that sovereign countrys president off to a Florida jail cell, I have had a nagging sense of bewilderment at what seems to be a certain growing disconnect in matters of international affairs.
Examining the evidence, it seems as though the world has rolled over for the U.S. Empire and is now capitulating to pretty much every demand out of Washington, no matter how egregious.
Per the case of Panamas Noriega, how would we here in the U.S. react should a platoon of crack Iraqi paratroopers storm the Texas compound of George Bush Jr. and take him into custody for destroying their country an act that is demonstrably far worse than any real or imagined crime committed by Noriega against the U.S. prior to his incarceration?
The repertoire of U.S. actions, which in recent years has included launching full-scale preemptive strikes, as was the case in Iraq, and drone attacks in other countries, begs the question of what role it is that the U.S. is now playing on the global stage? Are we now the de facto global government, able to act at will whenever and wherever we choose? Are the laws that limit the actions of other countries not applicable here?
Some recent actions that have caught my attention.
Drug terrorists in Ghana. It was reported last week that three men from the African nation of Mali were busted in Ghana for conspiring to sell drugs in Europe. But it turns out that the arrests were made in a sting operation run by the U.S. Drug Enforcement Administration (DEA), and that the men were then stuck on a plane and shipped to New York for trial. Apparently, the DEA decided that the men might have an affiliation with Al Qaeda, and that along with a threat and/or payoff to the right people in Ghana it was necessary to extradite the men to the U.S. for trial. Read the article from the LA Times and see if you can find any credible rationale for us sticking our noses into Ghana to arrest men from Mali for planning on selling drugs in Europe, with zero U.S. connection that I can discern.
Open up, Mr. Karzai, its the FBI. A story that caught my attention over the weekend involves an old blood feud between relatives of Afghan President Harmid Karzai, a feud that resulted in the recent shooting death of Waheed Karzai, an 18-year-old nephew. The press reports discuss casually that the FBI is on the case, as if it is entirely normal and to be expected. Have you noticed how the FBI has been involved in a lot of this sort of thing around the world? In fact, theres hardly a serious international incident these days that doesnt cause the FBI to grab for their suitcase handles. Including, apparently, a murder in Afghanistan. Why? It must be noted that murderers in Baltimore or Chicago enjoy no such attention from the G-Men. So, what are we doing? What is the precedent? Again, Im just asking, because I really dont understand what our government is doing. Heres the story.
The $536 million Credit Suisse fine. I also thought it was interesting that the U.S. government found that Credit Suisse violated international sanctions against doing business with Iran, and unilaterally used its muscle to wrest a $536 million fine out of the bank. And that, further, about half of the monster fine is to go to the U.S. federal government, with the balance split between New York City and New York State. Maybe you understand why the U.S. alone gets the fine, and why half is dedicated to New York, because I can make no sense of it. (And, by the way, the prosecutors are so satisfied with the result that they are now apparently limbering up to apply the same treatment to a whole slate of other international financial institutions.) Meanwhile, theres no noticeable protest from the Swiss government about the hard treatment one of its leading banks is getting. Heres the story.
Geneva Convention? I seem to recollect that when Country A invades Country B, and the soldiers of Country B fight back and are captured, they are covered by certain international laws, most famously the Geneva Convention. Yet, such niceties seem to have been thrown out the window by the Bush administration. Oddly, Team Obama has continued to advocate much the same policies. While there are many examples one could point to quizzically, the case of Mohamed Jawad, an Afghan teenager who was captured and charged with tossing a grenade at a U.S. jeep during the war, will make the point. On being captured, he was tortured, wrapped up, and sent off to Guantanamo, where he has been cooling his heels since 2002.
Do as we say, or else. The U.S. Congress recently passed HR 4213, a bill that includes the following provision:
Reporting on certain foreign accounts: Requires foreign financial institutions, foreign trusts, and foreign corporations to obtain and provide information from each of their account holders to determine if any account is American-owned. Foreign financial institutions would also be required to comply with verification procedures and to report any U.S. accounts maintained by the institution on an annual basis.
Any foreign financial institution that did comply with the new verification and reporting standards would be subject to a 30 percent tax on income from U.S. financial assets held by the foreign institution.
In other words, just because it can, the U.S. passed legislation demanding that every financial institution in the world spend time and money trying to ascertain if their account holders are from the U.S. and if so, they must break whatever their own national or corporate privacy regulations dictate by turning said account holders over to the U.S.
Taken in small doses, these and dozens of similar incidents represent interesting geopolitical oddities and, in the case of the Afghanis, an artifact from the nations strong reaction to 9/11. But viewed in the totality, these our way or the highway actions paint the picture of a changed role for the American Empire that, I believe, warrants some internal debate and clarification on just who we as a nation want to be.
It seems that the late-stage U.S. Empire is assuming all manner of new and far-reaching powers unto itself. When we can so casually toss the Geneva Convention aside and get away with it, or have prosecutors from individual states levying crushing fines on foreign corporations for defying international sanctions why, just about anything and everything is fair game. And given the dire financial straits of the empire, there is the very real risk that it could get much worse.
In time, however, this sort of thing is likely to beget a blowback and when that happens, it will constitute more than just the refusal of foreign banks to have anything to do with U.S. individuals. Foreigners will stop wanting to do business with American corporations, stop cooperating on security issues, and maybe even feed us back our trillions of dollars they now hold.
Over the weekend, I took the kids to see the new blockbuster, Avatar. Despite being somewhat fatigued due to the aforementioned appearances on the local party circuit, I stayed riveted to the screen for the entire movie.
(As some of you may recall, my movie rating system revolves around slept a lot, slept a little, didnt sleep at all this was definitely in the latter category.)
The film is graphically stunning, very well crafted and I even liked the story, despite the obligatory odes to unspoiled nature and mans devastating effect on same. Or the fact that the bad guys are businessmen and miners at that. But the storyline doesnt overwhelm the movies far more interesting science-fiction aspects, the cinematography, and the fast-paced but not over-the-top action sequences.
While the film is shot in 3-D, James Cameron, who wrote and directed it, didnt make much use of the technology at least in the sense that things are constantly flying out of the screen at you. And while I have heard complaints that some people were made nauseous by the effect, there were only a couple of passing scenes in the beginning that had that brief effect on me. Even so, the pacing of the film is very tight, and so the 2 hours and 40 minutes go by quickly.
The movie is rated PG-13, but I think its safe for any kid over about 8 or 9 and anyone older than that should enjoy it.
David Galland is the managing editor of Casey Research.