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

Opportunity

Critics abound; there’s always noise from the cheap seats when things get tough in the arena. Thus, one must be careful to judge.  We’re not sure we could handle things any better than Barroso and the other EU types.  But from the comfort of the keyboard, one thing is clear – they’re deer-in-the-headlights, every one.

We noted much earlier, and refreshed the other day that it is either fiscal union or the end. And the end may be a good deal more frightening than most expect.  This is because extremists, especially leftists, are revolting at the mere hint of austerity. Already Greek types are casting the Germans as Nazis (as they beg for even more German money).

For many, lurking just backstage, this is the opportunity of a lifetime.

We will see, are seeing in fact a lead up to WWI all over again - the blame game so typical of European politics. It is time to invent an enemy, just as the Muslim troglodytes know exactly how to invent a diversion, a camouflage for their blunders. For these thugs, it is the West; for failed E-Z states, it is Germany.  Right now, the weak and incoherent - most of Europe, are damning the unified and solvent - Germany; they, who have done almost everything wrong and Germany who has done almost everything right.

The final step in this choreography - to be interrupted only if the German culture suddenly remakes itself to accept flip flops at work, 3 hour naps, and chronic tax cheating as a national pastime, and abandons its meritocracy and the rule of law for self indulgence and cynicism - will be the appearance of another Mussolini, or Franco, or a Metaxas, just this time in a pin stripe suit.


Robert Craven

Fear

Kaiser Wilhelm II failed; so did Hitler.  Not Merkel.  She took Europe without firing a shot.

It is a new era for this region, something which all but the willfully blind must recognize.  And certainly every trading desk must recognize.

So there is angst among those nations of lesser merit; actually, there is fear. Hollande shouts (while trembling) that the Mediterranean notion of “growth” should trump Germanic notions of austerity. All over Europe the gospel is that prudent Germans are at the root of the E-Z meltdown. But in bashing thrift and industry, debtors run the risk of a backlash from a nation which is called upon to deliver even more capital to salvage the reckless. And past “backlashes” were not pleasant for those involved.

WWI, WWII – Anytime Germany was 1) unified and 2) isolated, armed conflict followed. And nowadays, there are better ways than the tank and the Messerschmitt.

Our neighbor Vic Hansen wrote the other day that, “History is quietly whispering to us in our age of amnesia: ‘I would not keep poking the Germans unless you are able to deal with them when they wake up.’”

Indeed, the old WWII constraints are eroding, if not gone. The allies had a solution – split Germany. Germany recently paid $2 trillion to become whole again.

Germany played by the rules while the EU has turned into a Ponzi racket – poorer southern members cooked their books to get German cash. Once caught, they blame their plight on German mercantilism and export-driven profit mongering.  This is as stupid as it is dangerous.

Where is America? America leads from behind, if at all. A rag-tag NATO is confused and afraid, abandoned to face a united and very rich German state.

It is this reality which is the overlay to all the rest – the noise, the phony solutions, all of it; they mean nothing.

It is the fear of German retribution, of a smothering out of what little is left of E-Z member national  identity, that is the common denominator driving every debate.


Robert Craven.

The Anointed

Whenever an individual or group of individuals set about to direct economic affairs, disaster is the result.  This has been everywhere and always true; along with death (we omit “taxes” as the Greeks have demonstrated this exercise is voluntary) it is a guaranteed outcome. 

Just a bit of knowledge of history, a tiny serving of economics is all that is needed to understand this reality.  But lessons are never learned. Round and round we go.

We have witnessed this result in the US as an interventionist administration, gifted with great insight passed down directly from the gods has thwarted what otherwise would have been considerable economic progress. 

And now we have witnessed the same result but many times expanded as European elitists, the anointed, “their minds dulled by generations of inherited wealth,” as Liam Halligan of the Telegraph put it, set about to create their own commune (just as so many of the similarly afflicted did in Taos New Mexico in the 60’s; trust babies, nursing on the milk of Marx). Or that was the plan - one big happy E-Z family. Their motto, as borrowed from N.L. – “From each according to his ability; to each according to his needs.” 

Scornful of those of us who warned it could not work, we were dismissed as cranks at worst, as the simple working folk at best.

The books of Hayek and Freidman were thrown to the bonfire, those of Engels, Schumpeter and Veblen enshrined.  Lessons unlearned.

And now? And now most expect we are to live with this mess for years. Not likely. As we highlighted many weeks back, it is either fiscal union or the end. And it will come faster than most expect.


Robert Craven