Sunday, August 02, 2009

The comments of a well regarded financial analyst follow after my modest words, some of which some of you may have seen.

The American people have become OPM addicts. They have yet to realize that there is no such thing as Other People's Money. Originally OPM was distributed by the government during balanced budget days as permitted by the second part of the Income Tax Amendment to the U.S. Constitution. It took Congress little time to learn that distributing OPM was a great path to reelection and the prestige and benefits that ensued. It worked so well that another privileged class of citizens was established -- the mandarins, unelected, on the committee staffs and in their own offices. Just like the Mings and the rest of the Chinese dynasties those elected could then pay attention to lofty ideas which would assure their position by securing contributions from their large money supporters while delivering OPM in the form of bread and circuses to their Districts.

We had been formed as a nation based on the idea that the elected viewed their position was temporary and gave them an opportunity to serve. Foolish drafters. I measure the growth of government by the increasing number of concrete edifices constructed in the District of Columbia and environs. Supposedly to provide nesting places for our elected representatives, they are in fact homes to the permanent governing class -- the unelected mandarins -- who remain forever, serving as they did the dynasties of elected officials in ever increasing numbers.

This has been going on for decades. The Senior Executive is limited to two terms. Legislators can last forever, or as long as the Depends supply holds out.

But it costs tens of millions to be elected to Congress for a two or a six year term for a salary, benefits, and prerequisites which total probably no more than $500K per year.

Your first job as a legislator is to be re-slated and reelected. Congressional safe seats are reapportioned in the states after every census. The number of truly contested seats decreases every ten years. The redistricting would make Elbridge Gerry proud.

Nevertheless there is a hot pursuit of money for campaigning and a parallel hot pursuit of money for pork. Some smart mathematician should be able to figure out the relative value of campaign dollar versus pork dollar in terms of votes.

Reelection assuages egos, provides a comfortable life and an excellent formal and informal pension. The formal pension comes computed and paid by the Federal government. In most cases it is dwarfed by the informal pension paid by special interest groups from corporate to labor to goo-goos for the services rendered in the practice of lobbying.

The reason term limits failed was because it would have released too many ex-legislators into the pool of lobbying swag, to divide it up into smaller pieces.

The veneer separating the taxpayer from his elected representative gets thicker every year. The contribution letters become more frequent, the contact directly more distant, the size of the office staffs every greater, even as the congressional staffs -- the permanent mandarins -- grow larger

The evidence is clear -- the 1,000 page bill which no body can read and understand is the product of the mandarins on the various committees who communicate with the mandarins on the office staffs. The elected official does what his mandarin tells him. The 1,000 page bill makes reference to the million pages of statutes which reference each other. Would that Gilbert and Sullivan were alive today.

Which places the ideologues in control -- the missionaries for special political interests -- firmly in the drivers' seats.

With the elected interested solely in reelection and not the welfare of the country, with the purposeful complexity of the legislation designed to obfuscate its results, the citizen is at a loss.

He is less than a semi-colon in the legislator's existence -- unless he has enough money to get some attention or can promise a differential bloc of votes, or even better, both.

On a mailing list, he receives form letter. On the internet, he receives self-serving so-called surveys.

And the OPM distribution goes on. Even the Lord stopped distributing manna from the heavens after they passed through the desert. Our lords know no such bounds.

pete speer

Date: Sun, 2 Aug 2009 02:28:19 -0400
From: David.Kotok@CUMBER.COM
Subject: Cumberland Advisors Market Commentary

Cumberland Advisors
614 Landis Avenue Vineland NJ 08360-8007

August 2, 2009

Genesis 1:31 says “And God saw every thing that he had made, and, behold, it was very good. And the evening and the morning were the sixth day.“ A few millennia later, we find that the world’s most popular book can be applied metaphorically to the US House of Representatives, as it labors in the creation of clunker-nomics.

The first billion voted by the Congress for the $4500 clunker rebate program was exhausted in 6 days. Practicing for deity status, the House beheld and determined “it was very good.” They immediately passed a $2 billion addition. That bill now goes to the Senate, which will pass something similar, and then to a conference committee to resolve some differences about rules. We expect additional funding will be forthcoming quickly. Congress loves to spend and Americans love to receive.

In the spirit of Genesis, Adam and Eve American, otherwise affectionately known as John and Jane Doe, recognize a good deal when they see one. They had an old clunker worth a few hundred. Suddenly they can exchange it for $4500 if they buy the new one now. The rest they can finance at very low interest rates, thanks to the Federal Reserve and the Treasury for extending TARP and other funds so that lenders can offer them liberal terms. They seized the moment – who can blame them?

This will boost short-term activity in the US. Neil Soss of Credit Suisse estimates, “Our math suggests that vehicle sales could spike in July, perhaps to a run rate near 12.5 million units (at a seasonally adjusted annual rate) from the 9.6mn average of Q2.” He adds that “in response to cash-for-clunkers … the personal savings rate will drop sharply in the next months, even as the longer run trend is still headed higher.” That will ramp up auto production in the 3rd quarter. Neil concludes, “As a consequence, we are revising up our Q3 real GDP forecast to 2.0% (from 1.3%) and our Q4 forecast to 2.5% (from 2.0%).

Okay. We know that older and fuel-inefficient cars are supposed to be scrapped. That is supposed to be an environmental improvement. And we know that the United Auto Workers like this stimulus, for obvious reasons. So do the government-owned or government-sponsored auto manufacturers. The last private firm, Ford, will benefit, too.

Does the clunker stimulus result in enough gain to offset the net present value of the perpetual cost to finance it? Fair question? We think so. Is there an answer? Maybe, but the proof is very difficult to establish. It you are interested in this discussion, invite a few friends over for a beer and talk about it. But make sure the beer is brewed in America by the United Beer Brewer Workers. And when you toast, toast Ford and be a patriot.

Did anyone ask how many of these car sales are being “borrowed from the future?” We didn’t see it in the Congressional commentary. If it was there, it did not influence the political decision.

Has anyone looked at what we have done in a macro sense? We will try.

The United States borrowed 1 billion dollars. It is unlikely to ever pay it back. The annual interest will add $50 million to the federal budget each and every year, forever. We are assuming it is financed today with 30-year Treasury bonds. The additional $2 billion of borrowed clunker money will add another $100 million in interest. So clunker-nomics has committed the nation to make this interest payment forever.

Practicing an industrial policy by inserting government into a mixed economy is the new America. No one measures the exchange of short-term gain being substituted for longer-term taxes or inflation or debt-burdened slower growth. Those economists who are full believers in expectations analysis argue that the market will immediately adjust prices to reflect this exchange. Maybe so in the mathematical models that they use to justify that argument.

We think this expectations analysis fails in the real world. Adam and Eve American are not economists. They make their decisions for their individual benefit and in terms they can understand and assess. They know what a $4500 free gift is. They understand it. They do not deal with trillions of dollars; they do not conduct ever-increasing auctions of Treasury notes and bonds; they do not deal in foreign exchange and reserve transfers. That is not their fault. The have daily lives to live and they are facing their own struggles.

So they delegate some of these borrowing and spending decisions to the Congress because they have no other choice. In the House the long term is limited to the two years until the next election cycle is faced. So the House will easily exchange $1 billion in spending for $50 million in added budget interest.

Thus we have an asymmetric exchange. We gratify now; we borrow to do it; we defer the day of reckoning; it grows bigger and bigger but seems to be perpetually deferred. Every once in a while a crisis unfolds and the system fails, as it did with Lehman Brothers last September. That triggers a new round of upward ratcheting of this asymmetric system.

When does it end? First question without an answer? Will the end be fire, or ice? Also, no answer. What should we do to protect ourselves? Much harder, but there are some answers. Diversify worldwide. Seek a mix of investing to protect wealth. Lastly, enjoy life and the weekend in the spirit of Genesis. Rest on the seventh day, if you can.

And remember that God gives you only so many days on the planet but doesn’t count the ones you spend fishing. We will wink at CNBC viewers on Friday, August 7 from Leen’s Lodge at the annual Shadow Fed fishing retreat, where 35 of us will debate and dissect asymmetric information and deficit finance. For now, we hope your seventh day is restful for you.

David R. Kotok, Chairman and Chief Investment Officer, email:


Copyright 2009, Cumberland Advisors. All rights reserved.


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