President Doggone, So Beastly and Woofly Clever!

Romney is unkind to animals says President 'Doggone' as he woofs down some delicious dachsund! Beastly Cleverest  Music Video Ever.  Just Great Satire!

http://www.youtube.com/watch?v=jE3cpsdMg3Q&feature=youtube

President Obama: "Dog Eater," the Music Video

By The Republican Party Animals| 1 video

Watch

Are young smarter than adult females?  (See 1 below.)
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There is no inflation if you do not eat or drive a car to work.  If you do then chew on this. (See 2 below.)

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Europe cannot avoid its own dark fiscal cloud! (See 3 below.)
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Two market views of two market experts if there are any  market experts.  (See 4 below.)
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To paraphrase Shakespeare -' out damn Constitution!' (See 5 below.)
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Dick

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1) Is Obama in Trouble With Young Voters?




new poll finds the president's share of the youngest voting bloc has dropped dramatically compared to four years ago.

Reuters

President Obama could be in big trouble when it comes to the youth vote, according to a new poll.
Less than half of 18-to-24-year-old voters want Obama to win reelection, and he leads a generic Republican candidate by just 7 percentage points, according to a survey of youth voter attitudes released Thursday by the Public Religion Research Institute and Georgetown University's Berkley Center for Religion, Peace and World Affairs.

That single-digit lead represents a dramatic drop from 2008, when Obama won the votes of that age group by a 34-point margin over John McCain -- 66 percent to 32 percent -- according to exit polls.

The survey didn't test Obama specifically against Mitt Romney, his Republican opponent -- it was conducted in March, when the GOP primary was in a more active phase. But the weakness for Obama, whose 2008 run was powered in part by a wave of youthful enthusiasm, is stark.

Obama may take comfort in the fact that he remains dramatically better liked by young voters than Romney. The poll found 52 percent of 18-to-24-year-olds having a favorable opinion of Obama, while 43 percent viewed him unfavorably; for Romney, it was just 32 percent favorable, 53 percent unfavorable. That could give Obama a bigger advantage with young voters versus Romney than his small lead against the nonexistent "generic Republican."

Obama also enjoys an edge in enthusiasm. Among his young supporters, 72 percent said they would be excited to vote for him, while just 54 percent of Romney's young supporters voiced similar excitement.
The youth vote isn't huge -- voters under 24 made up just 10 percent of the 2008 electorate. But results like these are the latest sign of the difficulty Obama may have as he tries to rekindle the magic of four years ago.

The new survey is based on online interviews with a Knowledge Networks KnowledgePanel of 2,013 adults and carries a margin of error of 3.3 percentage points. Though online polls aren't generally trustworthy, knowledgeable pollsters tell me this one is, in fact, reliable.
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2)Inflation Formula Critics: 'Real' Rate Over 10%, Unemployment Tops 20%

Maggie Humphrey, a price collector for the Bureau of Labor Statistics, visits the same grocery store every month in the Chicago suburbs to punch the cost of a pound of bananas into her Lenovo tablet computer.

“That price has not fluctuated since I’ve been here,” says Humphrey, who started gathering prices for the BLS in 2006 and has checked bananas at this particular establishment for about a year. She records it as 69 cents a pound and includes their country of origin, whether they’re on sale and any applicable sales tax.

Humphrey is among 400 price collectors who visit 23,000 locations in 87 cities every month to determine the cost of 80,000 products and services, from breakfast cereal to haircuts. She and her colleagues feed a database in Washington, where statisticians compile the monthly inflation report, used as benchmark for everything from Social Security payments to the value of Treasury’s inflation-indexed bonds.

The bureau’s price-gathering and statistical methods are standard practice from Japan to Switzerland. That hasn’t averted a lashing from critics who say the government is engaged in a campaign to hide inflation of 10 percent a year or more. Assurances by Federal Reserve policy makers that inflation remains “subdued” also haven’t deterred the skeptics.

“I’m as hawkish and worried about inflation as anybody,” said Stephen Stanley, Chief Economist at Pierpont Securities LLC in Stamford, Connecticut and one of the top forecasters of CPI over the last two years in Bloomberg News surveys. “But the idea that inflation is 10 percent is not a proper reading of the data.”

One Critic

One such critic is John Williams, the author of Shadow Government Statistics, a newsletter that he has run since 2004. Williams says the federal government understates the level of inflation to keep increases in Social Security payments and other costs down.

“The reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from Social Security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval,” Williams says on his website, shadowstats.com.

Williams’s alternate measure of inflation was 10.3 percent for the 12 months through March, compared with 2.7 percent for the Consumer Price Index. He calculates unemployment at more than 20 percent rather than the official 8.2 percent in March. His assessment of gross domestic product has clocked negative economic performance in every quarter since 2005. The Department of Commerce’s measure turned negative in 2008 and 2009, recording the worst recession since the Great Depression. The economy is nearing “hyperinflationary Great Depression,” he says on his web site.

Taking Issue

Williams takes issue with statistical methodology adopted by BLS since the early 1980s.

The first is “substitutability,” which accounts for people buying cheaper goods as prices increase. If the cost of two types of chicken breast rises, the BLS assumes consumers buy more of the less expensive one, giving it somewhat greater weight in the index.

The second is “quality adjustment,” which seeks to measure how goods change over time. For example, as ever-more-powerful computers are available for the same price, the BLS records this as a type of deflation. As the amount of fabric in clothing shrinks (think skinny jeans) that is noted as a type of inflation.

The third is “owner’s equivalent rent” which replaces the cost of owning a home with what it would cost to rent it.

Price Level

Had the BLS not altered its statistical practices over the years, Williams says, inflation would be reported about 7 percentage points higher each year, enough that the price level will quadruple in a little over a decade.

Williams sells subscriptions to his website for $175 a year. He declined to give the number of subscribers. “My business has been picking up over the years,” he said in a phone interview. “I don’t know I can attribute it to any one thing other than to say that most people do think that inflation is higher than the government is reporting and economic growth is weaker.”

Williams graduated from Dartmouth College in Hanover, New Hampshire in 1971 with a bachelor’s degree in economics and subsequently earned a master’s in business administration from Dartmouth. The background on his website says he worked as a consulting economist.

Alternative Measure

Some economists favor alternative inflation measures. The Federal Reserve aims for a 2 percent annual rate of inflation based on the Commerce Department’s personal consumption expenditures index, which averages about 0.5 percentage point a year less than the CPI. The Social Security Administration uses an index known as CPI-W, which rose 2.9 percent in March from a year earlier, compared with the main CPI’s 2.9 percent increase.

“These various measures, the CPI and others, PCE index and others, move very closely together,” Fed Chairman Ben S. Bernanke said at a Jan. 25 press conference in Washington. “And you are not going to have a situation where the CPI is 10 percent and the PCE is 2 percent. There may be a few tenths difference, but generally speaking they move very closely together.”

The BLS has responded to Williams’s claims in papers over the years. One such report in 2008 noted the degree of international acceptance of BLS methods, with 13 of the then-30 members of the Organization for Economic Co-Operation and Development using rental equivalence and 12 using the quality adjustment known as hedonics. Eurostat reports that 20 use the CPI’s method of substitution.

‘Could Quibble’

“There are places where you could quibble with what they’ve done to change the CPI,” said Pierpont’s Stanley. “But to say that everything that’s been done over the last 30 years to the CPI is illegitimate and what we should really do is look at the methodology from 30 years ago? Would we want to use the state of the art from 30 years ago for computers?”

The BLS provided details on its methodology because the “myths” about the CPI construction methods “continue to circulate,” BLS economists John Greenlees and Robert McClelland said in an August 2008 rebuttal.

The index has its roots in a World War I-era effort to adjust wages to rising prices. The first cost-of-living measures, published in 1919, concluded that not everyone could afford “all the necessaries, many of the comforts, and a goodly supply of the luxuries of life.”

Boskin Commission

In 1995, Congress created a commission to study the index, headed by Michael Boskin, a Stanford University economics professor and former head of the White House Council of Economic Advisers. Its review concluded that the index was overstating the inflation rate by 1.1 percentage points a year.

Congress authorized the commission during a period when members looked to cut government spending. The panel made 16 recommendations for changes to the index, estimating that they would shave $691 billion off the debt over the next 10 years.

Robert Gordon, an economist at Northwestern University and one of the Boskin commission members, estimated in a 2006 paper that the BLS changes removed only some of the bias, and the index remained about 0.8 percentage points too high per year, a sharp contrast to Williams’s claim that the level is 7 percentage points too low.

The CPI’s methodology drew attention again last summer when a group of senators looking to reach a deal to cut the deficit considered switching government indexing to a CPI measure that, because of a methodology change, would lower reported inflation by 0.3 percentage point per year. Ultimately it wasn’t adopted.

No Opinion

“At BLS, we’re just dealing with the data, not the policies behind the data,” said Gary Steinberg, a press officer and more than 20-year veteran of the bureau. “We don’t have an opinion one way or the other on how the data are used.”

Williams’s criticism of the CPI focuses on the effect of substitution and hedonics.

“I believe Williams is right directionally,” said James Bianco, president of Bianco Research LLC in Chicago. “The measures as they were constructed 30 years ago would show higher inflation if we were using them today.”

Bianco said that the U.S. government does have an incentive to favor lower reported inflation because then it saves money on cost of living adjustments, union contracts and inflation-adjusted bonds that are benchmarked to the index.

“The current measures might only be a few percentage points different but even a few percentage points is still pretty significant,” Bianco said. “Lots of money rides on these numbers.”

Substitution Adjustment

The BLS doesn’t dispute that its adjustment for substitution tends to lower the index. Yet the size of the BLS changes is nowhere near the 7 percentage point difference that Williams claims, BLS officials said.

On average, the hedonic quality adjustment has increased, not decreased, the reported rate of inflation, the BLS says.

Ken Stewart, a BLS economist, compared the old and new methodologies over a 21-year period and has said the current procedure produces an annual rate of inflation about 0.45 percentage points lower.

“Hedonic adjustment makes sense to me,” said Michael Pond, an expert in inflation-indexed bonds at Barclays Plc in New York. “If I’m paying the same price for a good that is better, then I’m getting a better deal, getting more value for my money.”

Old Methods

From 1977 to 1998, the CPI showed a 141 percent increase in the level of prices. A product or service costing $10 in 1977 ought to have cost $14.10 more in 1998. The old methods would have produced a 163.9 percent increase, according to a paper Stewart co-wrote with BLS economist Stephen B. Reed.

Williams draws his estimate of a 7 percentage-point bias per year in part from this paper, he said in a phone interview.

“It’s a simple approach to it,” he said. A complete reconstruction would be “the type of thing that takes extraordinary time and computing ability, which I don’t have the resources to support.”

Independently of Williams, two economists at the Massachusetts Institute of Technology developed their own methodology.

Roberto Rigobon and Alberto Cavallo launched the Billion Prices Project in 2010, which builds on analysis that found Argentina understated its inflation rate. In the U.S. alone the project tracks over 5 million prices, Rigobon said, on pace for a global goal of 1 billion.

Basket of Goods

Rigobon said the project includes about 60 percent of the goods used in the CPI. The study reported inflation about 1 percentage point higher than CPI for much of 2010 and slightly more than 3 percent inflation in 2011, in line with the CPI.

“In a three-to-four month window, the inflation rate we report is almost identical to the CPI,” Rigobon said. That suggests that the CPI measure is accurate, he said.

For her part, price collector Humphrey in Chicago says she never can guess what the total CPI will end up being even after logging hundreds of prices month after month.

“It’s hard to have an intuition for the overall number,” she said. “You see a lot of prices, but it’s such a small part of the nation as a whole.”

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3)

April showers on the euro

The euro crisis is back, and resolving it is not getting any easier

Apr 21st 2012 | from the print edition

LIKE Brussels, with its fickle weather, the euro crisis enjoyed a hint of summer but has now returned to wintry gloom. The sun shone after the European Central Bank took action to avert a credit crunch. Now the storm clouds are blowing in from Spain. Yields on Spanish bonds are rising dangerously, and Italian ones are close behind. Like Spain, Italy will miss its deficit target this year and next. Portugal may also need fresh support.

For Eurocrats, these are but passing squalls. Summer will come, they say, so long as everybody sticks to the plans for deficit reduction. Spain is on track, insists Jean-Claude Juncker, head of the euro group of finance ministers. The IMF this week revised up its growth projections: the euro zone’s recession this year will be milder than it previously thought. So why the renewed panic?

The EU is more worried about its own credibility. 

Its new system of economic governance to impose fiscal discipline is coming into force. It cannot just look the other way when Spain wildly misses its target (with a deficit of 8.5% of GDP in 2011 instead of 6%). A compromise has given Spain a looser target this year, while keeping the objective of cutting the deficit to 3% of GDP next year. But that looks unachievable. 

The EU thinks sticking to targets is essential to restoring market confidence. Yet stubbornly chasing an implausible objective may also sap credibility.One reason is that markets are shifting their concern from deficits to growth. They fear that budget cuts are pushing countries ever deeper into recession. Investors may be as fickle as the weather, but the IMF, too, is warning against over-zealous austerity. Another reason is political mismanagement. The Spanish government delayed its budget for 2012 because of an election in Andalusia, created suspicions about the accuracy of its statistics, was cack-handed in its negotiation with the EU over a revised deficit target and messed up a bond sale just before Easter.

Beyond such economic worries, there is renewed political uncertainty. The election in Greece on May 6th is unpredictable, and a strong showing by anti-austerity parties could cast doubt on Greeks’ commitment to reforms. Even more important is the French presidential election, in which the rhetoric of both leading candidates may be a harbinger of fresh EU turmoil. Most Eurocrats had thought that the re-election of Nicolas Sarkozy, difficult as he may be, was preferable to the election of his challenger, François Hollande. The Socialist front-runner wants to renegotiate the euro’s fiscal compact. Few think the compact will solve the crisis, but at least it preserves German support and provides cover for the ECB to keep providing liquidity. The ECB has issued €1 trillion ($1.3 trillion) of cheap loans to banks which, in turn, have bought high-yielding bonds from troubled countries. This Sarkozy trade, as it is sometimes known in the markets, was an indirect (if inefficient) means for the ECB to support sovereigns.

Explore our interactive guide to Europe's troubled economies

Yet as the election has neared, Mr Sarkozy has switched from saviour to scourge of the EU and the euro, talking of reimposing border controls and trade protection and, most recently and most distressingly, leading an assault on the ECB’s hallowed independence. He has demanded that it focus on promoting growth as well as fighting inflation, and that it devalue the currency to boost exports. This is a breach of last year’s pact of silence, in which European leaders stopped exerting public pressure on the ECB. Mr Sarkozy may have delighted in leading the EU with the German chancellor, Angela Merkel. But he now talks wistfully of Charles de Gaulle’s 1965 “empty chair” boycott of European institutions. This may just be electioneering, but if the ECB is called upon to help once again, it may be less obliging.

In some ways the crisis may have become more serious now, as today’s policy tools lose some of their edge. Spain is a far larger problem than Greece, and it could drag down Italy and perhaps even France. The euro’s financial firewall has been strengthened, but it remains inadequate. The effect of the Sarkozy trade is fading fast. And it has loaded banks’ balance sheets with even more dodgy sovereign bonds, reinforcing the potential for a cycle of weak banks and weak governments to drag each other down. More austerity will damage both banks and sovereigns, in turn pulling down the economy.

In search of summer

What the euro zone needs is the means to break one or all of these feedback loops. The IMF says the euro zone should use its rescue funds to recapitalise weak banks in countries that cannot do so (ie, Spain), or bring in joint Eurobonds to reduce borrowing costs and create a safe asset. The ECB should loosen monetary policy to help growth (and keep using its liquidity and bond-buying tools). Strong countries should do more to boost demand. This is all good advice, but it is not going to be heeded soon.

The logic of the crisis requires the euro zone to become a more coherent economic unit. But national politics is often pushing countries apart. For now Germany will not hear of a European banking union, let alone a full-fledged system of fiscal transfers. And even if it were prepared to think of these things, France, whether run by Mr Sarkozy or by Mr Hollande, will resist the closer political union that Germany might demand as its price.

Perhaps leaders will change their minds when confronted with the dreadful prospect of a break-up; perhaps the ECB will bend the rules again rather than face extinction. Or perhaps the time will come when the world imposes adjustment on the whole euro zone, and not just on its most troubled members. By even the most optimistic view, matters will get worse before they slowly and painfully get better. A recent presentation by Goldman Sachs speaks of Europe’s long march to recovery. But unless the politicians deal with the euro’s underlying flaws, it could become a long and painful death march.

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4)Thinking Things over

Volume II, Number 15: Are Stocks Fairly Priced?  Efficient Markets and Inefficient Politics 

By John L. Chapman, Ph.D.       

Investors are living through an era of extraordinary uncertainty, as evinced by the incredibly wide range of professional opinion available at the moment from amongst the economic and financial commentariat.  In the following essay we offer a rationale for belief that the likeliest path in the years ahead is, unfortunately, Japan-like torpor, but a plausible story for a path to a sunnier future is also outlined.  

What Is the “Correct” Value for the S&P 500 Index? 

On October 28, 1980, Ronald Reagan met President Jimmy Carter in Cleveland, Ohio, in that fall’s only debate between the two Presidential contenders.  Coming just a week before the election itself, with polling still tight in most states and a third party candidate with potential clout (Congressman John Anderson of Illinois, who did in the event end up with nearly six million votes and tipped some states to Mr. Reagan), there was high drama attached to the evening, especially given the sorry state of the U.S. economy at the time.  Mr. Reagan won the debate and the election that night with a storied line in Presidential campaign history (“There you go again…..”), but his most important line of attack that evening spoke to the millions of workers, employers, and investors who had been hammered by the ”stagflation” of the 1970s.  Quite simply — and devastatingly — Mr. Reagan asked American voters: “Are you better off than you were four years ago?”  It was a fair query in a time of 21% interest rates, 13% inflation, nearly 8% unemployment, and corporate investment and real wage growth that had reached post-war lows.

The stock market in 1980 was in a moribund state, then in the 15th year of the long 1966-82 swoon, when U.S. equities lost 70% of their real value.  After peaking in real terms in 1968 when crossing 108, the S&P 500 Index began 1980 at 105.76, and finished the year up 28%, north of 135 on the Index (or, up about 14% in real terms thanks to the 13.6% inflation rate in 1980 in the U.S.).  There was no valid reason for a 14% real gain in U.S. equities that year: the economy was in the first leg of a “double-dip” recession, corporate profits were stagnant, investment had been choked off by high interest rates and high and variable inflation, and the trade-weighted value of the U.S. dollar continued its decade long, post-1971 slump.  Further, tensions were rising abroad, with oil threats due to a revanchist Iran, which had committed an act of war in transgressing the U.S. Embassy in Tehran; the Soviet invasion of Afghanistan and its Navy installed at Cam Ranh Bay, while the Chinese Army menaced the Vietnamese border; and a tenuous Mideast “peace process” that was soon to blow up with the brutal murder of Egypt’s Anwar el-Sadat in 1981, threatening another Arab/Israeli war.

What then could account for the strong showing for S&P 500 stocks that year?  The only variable that offered investors upside at the time was the election of Mr. Reagan, and some level of prospective change in the macroeconomic policies pursued by President Carter.  And indeed, history bore this out, for investors who bought stocks in U.S. companies in 1980: after the Economic Recovery and Tax Act passed in August, 1981 (and its promised deep cuts in marginal tax rates beginning in January, 1983), combined with Mr. Reagan’s active and vocal support for the Volcker Fed’s strong dollar policy and the Administration’s commitment to curtail regulatory and antitrust roadblocks, the end of recession in 1982 ushered in an unparalleled boom in U.S. equities into the new millenium.  After the fact, we can see that a time of darkness for investors, when gloom was pervasive, was instead, as Warren Buffett later called it, the most extraordinary buying opportunity in generations. 

The lesson from that period is that policies out of Washington that are conducive to promoting a stronger U.S. dollar and better climate for investment (and thus, prospect for U.S. corporate profits) will surely lead to rising equity prices on a sustained basis.  Could this be at least somewhat true as well, of the current moment in the United States?  Out of such a deep recession, with significant unused capacity and idled resources, fallen wage levels, and ongoing deleveraging and recapitalization of both households and businesses, could we be on the cusp of a long boom once again?

On this, opinions are far and away divided.  Professor Jeremy Siegel of the Wharton School of Business is extraordinarily bullish: he thinks stocks are at their lowest levels, in a relative sense, in six decades.  Says Mr. Siegel:

Stocks are fairly cheap on an absolute basis. They’re extraordinarily so on a relative basis, about the most relative cheapness I’ve seen stocks probably since the 1950s.  In 2000, we were starting at a 30 price-earnings ratio. That was the most that the stock market has ever been in the world.  It’s not surprising the next decade is going to be bad when you start at a 30.  When you start at a 13 price-earnings ratio….the future is much, much brighter. We’ve never had bad stock returns over the next three, five, or ten years when you start with a 13 P/E ratio, and that’s a world of difference.   

Mr. Siegel has gone further, and is on record in just the last week as saying there is a 75% chance the Dow Jones Industrial Average will hit 15,000 by the end of 2013, and a 50% chance it will hit 17,000 (representing 16.7% and 32.3% increases, respectively, from the current valuation level, if these levels were attained), thanks to price-earnings ratios being below their historic means (actually, the Dow Jones P/E is currently 14.4, while the S&P 500′s is at 16.3) alongside a very healthy U.S. corporate sector grown leaner and more efficient in the late recession, and thus able to sustain current profit levels.

Mr. Siegel’s thesis is even more plausible as a relatively short-term call when considering U.S. monetary policy (which, strangely, the Wharton professor and long-time bull routinely ignores): prospects are lengthening for some sort of ”QE3″, or continued ease well into the middle of this decade, absent any inflationary bursts in the U.S.  And, while never good over a longer period for asset prices due to the capital malinvestment and over-leveraging spawned by excessive monetary and credit expansion, in the short run, Fed easing moves have routinely led to a positive “bump” in financial markets since the 1970s.  Thus, Dow 15,000, at least, certainly seems plausible (and an equivalent move up of 16.7% for the S&P 500 Index would take it to 1618 by the end of 2013, implying a P/E little changed from today if consensus earnings expectations are met).

But there are of course major warning signs on the horizon, too, and Gary Shilling well represented bearish sentiment in an interview on Bloomberg TV on April 11, when he predicted a sharp drop in U.S. corporate earnings this year and the likelihood of a U.S. recession, with stocks in the S&P 500 Index retrenching to 800:        

The analysts have been cranking their numbers down. They started off north of $110, then $105. They are now at $102 [for S&P 500 earnings in 2012]. They are moving in my direction. I think that is true because you have foreign earnings that don’t look good because of recession unfolding in Europe, a stronger dollar, so there are [currency] translation losses. A hard landing in China. In the U.S., we could see a moderate recession led by consumer retrenchment. I think that my earnings estimate [$80] is not unreasonable…it’s a quartet [of investing strategy, now]; [I am] long treasuries, short stocks, short commodities, and long the dollar.   The story is that there is nothing else except consumers that can really hype the U.S. economy. Consumers have been on a mini spending spree…[but] incomes have simply not kept up. Of course, the real key behind that is employment.  It looked earlier like jobs were picking up and that was going to provide the income and people would spend it, so on, so forth. But the employment report that we got last week throws cold water on that. Consumers have a lot of reasons to save as opposed to spend. They need to rebuild their assets, save for retirement. A lot of reasons suggest that they should be saving to work down debt as opposed to going the other way, which they have done in recent months. So if consumers retrench, there is not really anything else in the U.S. economy that can hold things up. 

This is a thoroughly Keynesian analysis, and one long favored by Mr. Shilling: for him as for Keynes, consumer spending drives the economy, not investment; a strong dollar is bad for stocks because it is bad for U.S. corporate earnings of multinationals; saving is antithetical to a vibrant and growing economy because it short-circuits the stream of spending and thus aggregate demand and corporate profits.  All of this is incorrect in our view for anything other than the short run (which, after all, was Keynes’ focal point), but this is beyond the scope of the present discussion.  For indeed, Mr. Shilling’s “mode” of thinking is fairly representative of money managers and analysts on Wall Street.  Current bears such as Nouriel Roubini or PIMCO’s Bill Gross would not at all disagree with Shilling’s general line of thinking, if not his magnitudes.

Mr. Shilling goes on to add that the U.S. economy is the “best of the bad lot.”  China, Europe, and Japan all represent near-term recession for him, but capital flight from those markets will not, in his view, move toward U.S. equities.  Instead, he is looking at the U.S. Treasury’s long bond, and sees the yield heading to 2.50% by next year (from 3.12% currently), while the 10-year is headed to 1.50% from 2.04% at the moment.  Who is right: a “bear” calling for 800 on the S&P 500 Index, or a “bull” calling for 1600?

Markets are “Efficient” — in the Long Run

Space does not permit us here to review the high-frequency economic data out in weekly droves about the U.S. economy, but as a general matter, beyond China, the Eurozone (and now Spain, especially), Japan, and the unsettled Middle East, indices for such items as employment and job growth, consumer spending, corporate profit growth and target achievement, housing and consumer durables, factory orders and utilization, and even some of the sentiment indicators, are all off their recent highs, or up-trends.  There are cautionary winds abounding at the moment (countervailed by continued extraordinary ease in monetary policy).  We are led in such a moment to take comfort in the University of Chicago’s Eugene Fama, the father of modern finance, whose pioneering work on asset prices furthered the CAPM and APT models, along with notions about the relative degree of pricing “efficiency” in asset markets, moment to moment (and Professor Fama, in our view, should have won the Nobel Prize by now, a crime we hope and anticipate will be rectified in the next few years).

To actualize Fama’s core teaching, we cannot know if asset prices — in this case, U.S. equities — are priced “efficiently”, that is to say, ”accurately” in an “objective” sense, at the moment.  But we can have strong confidence that they will move toward “accuracy” in a year, in five years, and in ten years even more so, to the degree they are mis-priced today.  And in this regard, use of the Shiller P/E ratio, which uses a previous ten-year average of earnings as opposed to 12-months trailing only (or, 12-months forward, in the case of forward estimates), smooths out the past by eliminating outlier periods to a degree.  Combined with fundamental analysis of U.S. corporate assets moving forward in tandem with likely U.S. monetary policy, the Shiller P/E gives us some measure of confidence in our positioning for near term direction in markets.

And here, the Shiller historical chart is interesting as well as revealing:        

Chart I. The “Shiller P/E” Ratio for the S&P 500, Extrapolated Historically, 1881-Present 

In fact, the long-term mean of the Shiller P/E ratio is 16.42; it is nearly 23 today.  That is one cause for concern, if one believes, as does Professor Fama, that markets are more informationally-efficient today than they have ever been in the past (the dot-com bubble and Fannie/Freddie/Fed-induced frauds notwithstanding).  To see the rise in equities that Mr. Siegel does, S&P earnings would have to climb to $110 per share next year, and have sentiment in the U.S. raise the P/E ratio to nearly 25, to hit 1618 on the S&P 500 Index.  Fundamental analysis of U.S. corporate earnings prospects would seem to negate this as a possibility, but equally so does it for a drop of the magnitude forecast by Mr. Shilling (that is, for the S&P 500 Index to fall to 800, a drop in earnings to Shilling’s estimate of $80 would mean that sentiment alone would pound down the Shiller P/E to 14 a year from now, say, from its current level of almost 23 today).

Of course, Mr. Shilling’s prognostication is possible: war in the Middle East, a blow-up in China, confiscation of all earned income above $500,000 in Eurozone countries (such as is now being promulgated in France by the far-Left candidate, Jean-Luc Melenchon), and, we cannot forget, anti-growth policies in the United States (such as huge tax increases beginning in 2013), could all combine to “pile-drive” equities down to 800.  But our scenario analysis utilizing the Shiller P/E tool, precisely because of its effectiveness in smoothing out earnings trends — and thus, in a way, pointing us toward Fama’s long run “efficiency” in asset prices — combined with fundamentals extant in the U.S. economy with respect to corporate profit growth and continued monetary ease in the U.S., all lead us to believe we are in a ”long-term trading range” of 1080-1550.   The trick for investors in the time ahead will be to seek hyper-efficient, global diversification (of asset classes as well as geographies) along with being alert to “special situations”, cases where, say, an individual stock is grossly undervalued.   To go on record specifically, we are cautious at the moment, support the use of cash as a de facto asset class itself in this period of remarkable uncertainty, but do anticipate 2012 being a year of growth for U.S. equities (it is more than possible though that the S&P 500 Index ends 2012 close to where it is right now, albeit with some volatility in the months ahead — this would represent a gain of roughly 10% on the year, which is where we are year-to-date).

What Would Lead to a Brighter Future?

The decade of the 1970s — and especially 1974-82, when real economic growth in the U.S. averaged 2%, far below the historical norm of 3.4% in the United States– was a time of stagnation and lousy performance for U.S. equity markets.  More than anything, what broke the torpor of that time was a new policy regime in Washington, D.C., one that was long-term oriented.  It was a policy mix designed to be friendly toward capital investment, savings, entrepreneurship, and income generation, to all of which a happy resulting concomitant was the deployment of radical new technologies that spurred productivity in the ensuing 25 years.   There is no reason the current torpor cannot also be eradicated, through policies that are once again capital-friendly and pro-growth, or pro-prosperity.  The Shiller P/E graph shown above looks “ugly” during the 1970s and early-80s, and then looks much better after 1982.  How can a similar turnaround be effected once again?  

As has been the case since the American Civil War, the key for the global economy as well as here is a change in economic policy in the United States.  For indeed, as we never tire of pointing out, as goes the United States, so will go the rest of the world.   A return to a sound dollar policy is imperative, and it means the slow but systematic shrinking of the Fed’s balance sheet and — ideally — explicit commodity price targeting.  Better fiscal policy in the U.S., best portrayed in spending roll-backs and pro-growth tax cuts (such as, in a perfect world for example, the elimination of the tax on corporate profits), would mitigate rising interest rates in the U.S. (and around the globe), and open the door to productive and badly-needed investment.  And, a reduction in the increasingly out-of-control (and job- and investment-killing) cost burdens entailed in the interventionist oversight framework in the U.S. would complete the monetary-fiscal-regulatory trifecta that is now so needed, and go a long way toward beginning a new and exciting era in world history.  For the good news is, the world stands on the cusp of technology-driven revolutions in dozens of industries, from energy to health care to manufacturing to information-based and knowledge-intensive sectors (e.g., education, financial services, production control), but at the moment, the policy framework to exploit these radical new innovations is missing. 

Bluntly, the denizens of the developed countries around the world — that is, the countries that drive global growth – now face a choice: continued slow, sclerotic torpor in the form of sub-2% annual growth for the advanced economies, thanks to an ever larger footprint of government in their respective societies, or a return to strong global growth in the 4-5% range (which implies the U.S. returning to its historic average north of 3%).  The former implies a long repeat of the 1966-82 market stagnation and real decline (or, we must sadly say, the 1998-2012 market volatility that led to no real growth in equity value, end-to-end), whereas the latter would lead again to real gains in equities — and in recapitalization of the entire U.S. (and global) economy.  With that, of course, comes rising living standards everywhere.  On these weighty matters the world’s voters begin making their fateful decision next month, with elections in Europe, and what may well be an historic inflection point on November 6, in the United States.       

Epilogue  

We never tire of showing the chart of Japanese equities after their peak in 1989, shown again below.  We cannot think of a better warning to U.S. policymakers about the consequences of their actions moving forward.  Twenty years ago Japan had a debt-to-GDP ratio of 35%; today it approaches 200%, after multiple and massive rounds of Keynesian “stimulus”.  Japan has always been a high-tax welfare state, the burdens of which have now “come home to roost.”  The Nikkei 225 chart shown below is a graphic portrayal of both tragedy and political class betrayal, but it is a history that every American voter would do well to apprehend.  

          Chart II. The Nikkei 225 Index for Japanese Equities, 1985-Present

             

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5)A Very Simple Job Description

By Jim Yardley

President Obama complains constantly that his job is made harder because of the negative slant of the Constitution.  The job description of the president of the United States, as described in the Constitution, consists of only 322 words (Article II, Sections 2 and 3).  That's it.  Three hundred and twenty-two words.

Not 322 pages, not 322 paragraphs, not 322 sentences.  Three hundred and twenty-two words.  Period. 

More than twice that many words (664, to be exact) are used in Article II, Section 1 just to define the process of choosing the president, and they include even the exact language of his oath of office.

This short job description covers only five areas:

• The president is the commander-in-chief of the military.

• The president is responsible for insuring that the laws passed by Congress are executed and enforced as written.

• The president is allowed to grant pardons for crimes other than impeachment. 

• The president can also make treaties, but only if two-thirds of the Senate agrees to the terms of those treaties.

• The president can nominate ambassadors, Supreme Court justices, and other officers (most commonly cabinet secretaries and federal judges).  But he can only nominate them.  Again, the Senate has final approval on any nominations.

That's it.  That is all the person who is president is allowed to do by law.  He or she can persuade, lecture, and speak publicly, using, in Teddy Roosevelt's phrase, his "bully pulpit" to encourage Congress to act.  In fact, he is required by the Constitution to do exactly that.  The theatre which is the State of the Union address made annually by the president is specifically required in Article II, Section 3, which begins:

He shall from time to time give to the Congress the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient[.]

It should be noted that governance of the nation by executive order or by administrative regulation is not mentioned in those 322 words. 

There was a very understandable rationale for the members of the Constitutional Convention of 1787 to describe very limited powers invested in the president.  A major source of contention between the colonies and Great Britain which led to the War of Independence was the behavior of King George III.  George believed that as king, he was an absolute monarch rather than a constitutional monarch.  As far back as the year 1215, with the Magna Carta, the absolute authority of the British sovereign was purposefully limited.  King George, with support from a majority of Parliament, who agreed that the king's authority should be effectively absolute, aided and abetted this set of circumstances against nearly 600 years of precedent establishing limited sovereign authority. 

With George III providing such a powerful example of what not to allow the head of government to do, the Constitutional Convention was adamant in limiting the unilateral scope of action of the president.  With the inauguration of Barack Obama, we can see clearly that these men were not paranoid, but prescient.  

Obama has acted in a way that is very similar to actions taken by George III in ignoring hundreds of years of tradition and legal precedent to enforce his whims.  This is particularly ironic behavior from a man who has written that he was greatly affected by his biological father's anti-colonialist and anti-monarchal attitudes.  One has only to look at Obama's own behavior to see that he himself tries to rule like a monarch in the mold of George III or Louis XIV, who famously said. "I am the State."  (Of course, ol' Louis actually said "L'état, c'est moi," but then he was French, after all.)  Obama governs as if Washington, D.C. was the mother country and the 50 states are just colonies that he too can rule according to his whim while ignoring hundreds of years of our history, tradition, and legal precedent.

Perhaps Barack Obama should examine what he is actually allowed to do and what he is actually supposed to do, and limit himself to those only.  If not, there is a very strong chance that history will repeat itself, as it does from time to time.  Over two centuries ago, the American people threw off a despot, and there is a high likelihood that such might be repeated on November 6.  One hopes this second removal from power will be accomplished with significantly less violence and loss of life than the first one was in 1776.

I would also like to hear from all the remaining Republican candidates a list of what they guarantee they will not do if they become president.  For example, they will not kill American citizens without arrest, indictment, and trial.  They will not try to allocate resources within the economy because they feel that the market's allocation of those resources is not as efficient as they might like.  They will not sign legislation that is of questionable constitutional validity.  If each of these candidates made a speech telling Americans what they will not do, not only would it be one helluva speech, but it would draw a strong contrasting picture of how they see the job as president when compared to how Barack Obama sees it.

Jim Yardley is a retired financial controller for manufacturing firms, a Vietnam veteran, and an independent voter.  

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