Thank you Anna

Most know by now that the great Anna Schwartz passed yesterday, at 96. As an economic historian she was without equal. As a critic of Fed policy she often shot from the hip; unfortunately for her antagonists, she did so with the accuracy of a Wyatt or Morgan Earp, or a Bat Masterson - cool and accurate.

We worked a tad with Anna and her co-author of A Monetary History of the United States, 1867 –1960, Milton Friedman.  It was October 19, 1993 in front of the House Banking Committee’s hearing on HR28, the Federal Reserve System Accountability Act, that Anna and I and Jim Miegs, with the help and endorsement of Friedman, were able to waylay Greenspan’s plans for continued cloak and dagger operations at the Fed.  The Act itself went nowhere but the hearing got policy makers’ attention, scaring the pants off most of them.

All were there that day, the first time all presidents and governors were under one roof. Guys in black suits with bulges under their vests were everywhere. Anna and I sat directly behind Greenspan and watched him sweat it out, deceiving the Chair that afternoon. That’s history. Greenspan saw the light; his illegal leaks to one of two reporters to the WSJ ceased immediately.  Seeds were planted for reasonable accountability. The FOMC decision was soon announced same day. 

It was Anna’s presence which really fetched the attention of the Fed in that she liberated Street economists to finally speak out. Before, most were afraid to say much under the threat of being fired (given the incestuous relationship between recognized dealers and the Fed) but Anna embolden these types, giving them courage; soon after, they came out of the wood work.  Suddenly a Goldman or Nikko couldn’t fire their economist for complaining about the obvious, on the pain of looking foolish and petty.

So we can bet that Anna is upstairs right now, researching away to her heart’s content.

Thanks again Anna for the inspiration. You and your work – neither could have been improved upon.


Robert Craven

Classroom

There is a flip side to today’s worrying events. Not just for arm chair philosophers, but even for example, spread traders, those of us who must have a notion of relative world dynamics to make a living. Thus it is better to understand the core of the present crisis so as to anticipate the next.

(Just for the record on the Euro: The thing was suicide from the start.  If Greece or others are ejected, fine; if they leave on their own accord, fine; if we have a disorderly break-up, fine. Bring it on. For those of us subjected to constant condescension from European elitist types a few years back, this event is just about perfect. US mutual funds and banks have less exposure to this region and are less linked to their European counterparts than ever. And we won’t starve without the E-Z for exports. Bring it on. We understand at this writing that today’s election may provide a pause. Greece will still head to the door, maybe September, maybe December. No way that economy can meet the bailout requirements and now way the Germans will throw them enough slack to make a difference.)

In the meantime we can learn something as to cause and effect. Whether it be the anointed who forced a common currency on the European masses (while skilfully avoiding the ballot box) or a far-left US administration which is trying to force a health plan on an unwilling populous – the result is the same. They defy human nature; thus, they will fail.

Witness success stories like New Jersey, Wisconsin, Indiana and Texas where voters faced and accepted the task at hand (unlike the E-Z) – simple but hard – cut spending, taxes and pensions; treat unions like the parasites that they are; cut bureaucracy. These states are thriving.

But why is it that California is losing folks at the rate of 50M per month? Why are CA businesses fleeing to Texas? Businesses cannot get out of here fast enough. We have beauty; Texas?  Well…. No matter. And “right-to-work” states in the south are booming. But CA is a poster boy of the left – school performance in the cellar, oppressive income and sales tax, a joke of a prison system, infrastructure a mess and, “a lordly public employee caste,” as Vic Hansen of the Hoover Institution so appropriately labelled this bunch.

Whether the Euro or Obama’s “vision,” Hansen notes that, “these are unsustainable ideas that are contrary to human nature and demand coercion for their implementation, given that they are increasingly anti-democratic and have to be implemented from high by an elite technocracy whether in Brussels…or Washington.”

The E-Z’s core problem then is not a hesitant ECB, not Merkel’s stubbornness. All but the wilfully blind now understand, as Hansen explains, “that the left’s statist model of trying to provide cradle-to-the-grave benefits, administered by an elite technocratic class, using demonization to bully the opposition and redistribute income, not only does not work, but cannot ever work.” It does not work for the democratic socialism of the E-Z nor the neo-socialism of Obama.

And this is why we welcome that feared, cataclysmic event - the breakup of the Euro. The rest of us, at least here in America, want past this nonsense. And this is why we welcome a return to balanced politics in the US, meaning a rejection of Obama and the radical left.  It too cannot happen fast enough.


Robert Craven

Strategist's Lament

It used to be all we needed to make strategy was a handle on the real sector just ahead.  Now it’s necessary to have a bug in Brussels, or Washington.

Without the plant we have no idea what our E-Z pals may come up with. Thus, we have had no recommendations to clients for fixed income, this region, nor spreads to this region.

We have a little better idea of events in the UK. It is true that after a satisfactory run, all of 2011 we over-estimated UK consumer appetite for H1, ’12, and manufacturing.  Weakness is now priced in, including contagion to the E-Z.

Thus, in the broadest sense the default or course-of-least resistance for the UK term structure is wider, even though mkt consensus is for more general weakness ahead. This spread may come in a bit given the circus in the E-Z; if it does so, and for example 2 – 30 approaches 270, then look to own (L-S) the spread.  Do not look to sell it under any circumstance.  The odds are not on your side, especially if the Bk of Eng decides for additional firing.

Things are simpler for the US.  As we highlighted earlier, key to understanding economic reality ahead is to be acquainted with politics, more so than any other time since the 30’s.

Thus, to the extent corporate planners expect a Republican victory in Nov, one can expect NFP’s to spark.  This is not about party affiliation; it is about being right.

Uncertainty is death for corporate types. They are paid to take risks but not on an uneven playing field with rule changes every quarter. They stay at the sidelines, which means cash.

Key culprit to a recovery is Obama. From Harvard prof Robert Barro: “Consider the expansion of social-safety-net programs, including food stamps, unemployment insurance, Medicaid (prospectively) and housing and mortgage programs. In a study published last month by the National Bureau of Economic Research, University of Chicago economist Casey Mulligan observed that, because these programs were means-tested (falling or ending as income rises), expanding them raised the effective marginal tax rate on labor income.”

Barro continues, “To achieve a real recovery, government policy should focus on individual incentives to work, produce and invest. Central here are tax rates and regulations, including especially clarity about future policies. In a successful policy package, the government would get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.”

But then we all know that, don’t’ we?  You want to devastate jobs creation?  “The most damaging and devastating thing you do to any businessman in America is to keep him in doubt and to keep him guessing on what our tax policy is.”  Who said this?  Lyndon Johnson.

But then Johnson was not a radical.


Robert Craven
 

Politics

Most economists usually side step politics. We don’t. If there is a linkage to the US real sector, let’s highlight that.

Obama inherited a situation he had a direct hand in creating. When in the Senate, along with Clinton, Dodd and others, he protected the twins from needed reform. As president, he then made things worse (although he blames lack of progress on the Republicans). The WSJ noted that he got almost all he wanted – stimulus, Obamacare, housing bailouts, Dodd-Frank and more. “…Obama has had the freest run of policy of any president since LBJ.” But as we explained for three years in our political blog, these were all policies bound to fail. This was the result.

Yet even given these man-made headwinds we expected the good ‘ol economy to do a bit better than it has, not hitting on 8 of 8 but at least 6 of 8. 

First, we missed the psychological impact of the potential fiscal blow coming at the start of 2013, on both consumer and business, but especially on job creation.

Most don’t need reminding that a calamity is scheduled to occur on Jan/1/13 unless politicians work to prevent it. The tax increases are from the expiration of the ’01 and ’03 tax cuts, the expiration of the payroll tax cut and the start of Obamacare tax increases – all to the tune of maybe $495 bln. The top tax rate on dividends will almost triple (15% to 45%); capital gains taxes will be 50% higher; taxes on wages will also spurt. Business planners will sit still. From the Heritage Foundation, “One business official says that ‘as long as proposed changes remain up in the air, companies will be forced to continue to burn fuel operating in a holding pattern rather than charting productive courses forward.’”  Translation – they will continue to hold cash rather than create jobs.

Next, although it was clear that employers had permanently done away with many job positions because new employees are to represent a time bomb (health care), the interventionist policies of the administration caused even more of an adjustment that we thought. For example, the explosive cost of Obama’s health plan is of course independent of the number of hours worked, only the number of workers. This is one reason hours worked are now back to pre-recession levels but the per cent of adults who have a job is in the cellar. Easy.

Finally, the antics of the deer-in-the-headlight types - elitists of the E-Z, are beginning to worry even the US, and not just exporters. It is opaque, it is fuzzy to most laymen but they have grown a tad uneasy nevertheless. Tiny Greece is one thing; Spain is quite another. Of course the equity market may be part crap shoot, but it worries folks when it tanks and the media links this to E-Z events. This breeds hesitation on the part of the consumer, equity holder or not.

To get outside and off the keyboard we do a bit of landscaping during daylight hours. Plants are fun but the exercise also provides a heads up. Gardens are a great litmus paper for consumer activity (or lack of) just ahead. They - gardens, are the first to go. Past two or three weeks we’ve noted a hesitation; folks less likely to put in a few more penstemon or clematis than they might have been in April. “We’ll wait a bit. Thanks.”

Politicians had better not.


Robert Craven