I just finished reading the Not Cool book by Greg Gutfeld last night. We had purchased the book at the book signing and I read most of the book during a long car trip to Georgia. I actually liked the book but had problems finding time to finish it. The theme of the book is a reminder how we sacrifice our freedom and individuality in order to look cool by certain social groups. If you find Greg entertaining on The Five, you will probably like this book, too.
Justice Thomas is my favorite Supreme Court justice. I like all of the justices but my appreciation for him started after listening to his autobiography, My Grandfather’s Son: A Memoir, several years ago. I checked out the audiobook from the local library for a long car ride to Virginia Tech. I enjoyed the book and over the years my appreciation increased as I read and agreed with his opinions on several court decisions.
Sometimes I wonder whether Vice President Joe Biden or Senator Harry Reid are in a friendly competition for the biggest gaffes. I think Harry just pulled ahead. Time to step it up, Joe!
A day after vowing to “do something” about the Supreme Court’s recent Hobby Lobby ruling, Senate Majority Leader Harry Reid (D-Nev.) reiterated Democrats’ desire to undermine the high court’s decision by attacking the “five white men” who voted in favor of the Christian, family-owned business.
There’s just one glaring problem with his statement .. .
Greg was in Cincinnati promoting his new book, Not Cool: The Hipster Elite and Their War on You . He is perhaps best known as the host of the Fox News Channel program "Red Eye" With Greg Gutfeld. Airing at 3 a.m. ET Tuesday through Saturday, that is way beyond our bed time. My wife and I know him primarily as one of the cohosts of The Five, a weekday program at 5 p.m. ET. Although I appreciate the opinions of everyone on "The Five", my ears perk up when he speaks. Like P. J. O’Rourke he always has interesting twist on the subject.
Saturday was a great day to be in Cincinnati. It was sunny and dry with temperatures in the 50s. Although it is not shorts weather for me, I saw some young men playing basketball in their shorts on a court near the freeway. The bookstore sponsoring the book signing, The Booksellers, was packed. Fountain Square and the sidewalks around the store were packed. It seems everyone wanted to get outside after a long winter. We had a great time and Greg was both witty and gracious.
I just finished reading The Age of Deleveraging by A. Gary Shilling and I agree with his analysis and conclusions. I think that his book is the most important book on economics that I have read this year so I included some notes from the book for my future reference. Part of the reason I enthusiastically agree with his analysis is because it matches my own analysis. Over several posts I have been looking for signs that the consumer is actually deleveraging. Part of my curiosity stems from listening to Dave Ramsey try to convince people of the benefits of becoming debt free and wondering whether he is part of a larger trend. The other part is trying to figure out what the average American will do with their investments and disposable income in a slow growth environment. Mr. Shilling and I come up with the same conclusion. It is time for the American households to unwind the excess borrowing on credit cards and student loans that occurred over the last thirty years. Consumer spending as a driver for the economic growth is tapped out.
In a similar way I was fascinated with the problems that CALPERS and other pension plans are facing if our economy fails to grow at 4% per year. It seems many of the pensions plans are making big bets that the economy will grow at 4% and the stock market returns will grow much faster than that. The reality is that CALPERS recently announced that their 1-year return was 1%, their 10-year return was 5.7%, and they are spending about 6.4% of their portfolio on benefits. For kicks I charted the inflation adjusted returns for the GDP(blue line), S&P 500(red line), and our total debt(green line). From the chart you can see a pretty good correlation between the three indices from 1980 until 2000. For that time period I came to the conclusion that the growth in debt from was primarily responsible for the growth in the economy and the stock market. Traditional economic theory seems to be working. After 2000 the correlation falls apart. It is as if we passed a tipping point and the equation we use to describe the economy changed. Increased debt was no longer a good thing for the economy or the stock market. Debt soared but the economy hardly budged off of its long term trend line and stock prices went down on an inflation adjusted basis. For pension plans like CALPERS that really sucks! For those who think we can borrow our way to economic growth, you need a new plan. I was pleasantly surprised the Mr. Shilling noticed the same problem with inflation adjusted stock returns and debt.
Here are my cliff notes from the book and two posts about the book at BusinessInsider.
Slow Growth Ahead
Global slow growth in the next decade will result from the U. S. consumer retrenchment, financial deleveraging, increased government regulation and involvement in major economies, low commodity prices and the shift by advanced lands to fiscal restraint.
No Help from Anywhere
Four more reasons for slow global growth: Rising protectionism, continuing U. S. housing weakness, deflation and weak state and local government spending.
Chronic Worldwide Deflation
Deflation comes in several varieties, but is fundamentally driven by supply exceeding demand. Productivity-saturated new tech and globalization will drive the good deflation of excess supply while slow economic growth introduces the bad deflation of deficient demand. As the combine, I look for chronic price declines of 2 to 3 percent annually.
Twelve Investments to Sell or Avoid
#1 Big-ticket consumer purchases
Consumer discretionary spending is getting whacked as Americans grow debt shy. Moreover, consumers will have less money to spend.
Autos, appliances, airlines, cruise lines and leisure and hospitality providers will suffer.
#2 Consumer lenders
America could be finally, finally kicking the credit habit. Credit card companies, like Visa (V), and various financial firms will pay the price.
#3 Conventional home builders
Home prices are dropping (Shilling predicts a 20% drop). People are losing interest in giant McMansions. Add to that America’s newfound antipathy toward debt and you’ve got a bear market for home builders.
You might want to avoid PulteGroup (PHM), Beazer Homes (BZH), M/I Homes (MHO), Ryland Group (RYL) and KB Home (KBH).
Collectibles are another casualty of deflation. That Rembrandt could be worth less in a few years.
Home prices aren’t done crashing. When they do, banks will suffer from a wave of foreclosures. The financial system will be revived after the crisis with new profit-crushing regulations.
Mortgage heavyweight Bank of America faces the biggest liability.
Shilling also names Goldman Sachs as a potential target for CDO suits.
#6 Junk securities
Shilling calls this year’s rally in junk bonds overblown. Slow revenue and cash flow growth will make it impossible for many firms to service debts.
#7 Flailing companies
Companies with below-average revenue growth and high fixed costs and debt will be the first to drop in the coming era.
Shilling does not give any examples. We’re going with US Steel.
#8 Low tech equipment producers
US industrial production has stalled and won’t need many machine tools and parts. Besides, these products are made a lot cheaper abroad.
#9 Commercial real estate
Demand isn’t increasing as the US economy stalls. Moreover, loans made in the bubble come due in 2012, threatening a wave of foreclosures that will crater demand.
Slow global growth means there won’t be much supply pressure for oil and other commodities. Meanwhile, deflation will bring down prices.
#11 Chinese and other developing country stock and bonds
Emerging markets aren’t there yet, Shilling says, and won’t be able to pick up the slack from a languishing U.S. For overheating markets like China, this will lead to a sudden crash.
#12 Japanese securities
Shilling predicted the Japanese crash in 1988, and he says the slow-motion train wreck isn’t over yet. Bad demographics and lack of export growth are just now making their pretense felt.
Ten Investments to Buy
#1 Treasury bonds
Shilling says he has been a 30-year Treasury bull since 1981. The "bond rally of a lifetime" is going to continue as deleveraging causes deflation. Even Ben Bernanke won’t be able to stop that.
#2 Dividend payers
There won’t be much growth, so you might as well collect dividends. A few examples include Procter and Gamble (PG), Unilever (UN), Coca Cola (KO) and PepsiCo (PEP).
#3 Consumer staples
Consumer discretionary spending is getting whacked, but people still need to buy bread and socks. Stores like Walmart are well-positioned to grow.
#4 Small luxuries
People want to spend money on something. Shilling says items like snakeskin tote bags, five-blade razors and designer jeans could be the new type of conspicuous consumption, taking the place of big ticket items like sports cars.
#5 The dollar
With Europe and Japan drowning in debt and emerging markets verging on a crash, the dollar is going to start looking pretty good. Shilling says the dollar will remain the world’s currency, with no real competition from gold or the yuan.
Meanwhile, America will be mired in deflation.
#6 Investment managers and financial planners
Low investment returns will discourage day-traders and encourage the use of professionals.
#7 Factory-built houses and rental apartments
Cheap small homes are the order of the day, as old people look for a cheap retirement spot and young people look for a small mortgage.
Renting will be a more and more popular strategy.
#8 Health care companies
As America ages, the health care industry seems unstoppable. Even Obama’s health care reform ended up boosting earnings for many companies.
#9 Productivity enhancers
Anything that helps juice bottom lines will do well in the new era. This includes consulting groups, computers, internet, biotech and telecom.
#10 North American energy
Shilling is bullish on deepwater drilling and natural gas, as well as coal and nuclear. He has particularly high hopes for the massive Canadian oil sands.
The bottom line for 2012 is that for advanced economies who are unwilling to devalue their currency, allow high interest rates, encourage high inflation rates, or default on their debt, the only solution is for these countries to pay down their debt. Without a financial calamity to motivate legislators to break the gridlock, this scenario sounds like a script for Mission Impossible. Does no pain translate to no gain? Sovereign debt investors would like these countries to grow and pay down their debt as part of the increased tax revenue but regardless of the economic growth or the pain, they will be paid or else that advanced economy and it’s sovereign debt degrades into “something else”. This “something else” position is assumed to be something similar to but not as bad as that experienced by Argentina in their 2002 default. It is generally assumed that a “default” should be avoided at all costs. Greece is teetering between “default” and something folks have started to call a “managed default”. “Managed default” is supposed to be a better situation than “default”. Regardless of which name you use to describe the situation, the sovereign debt investors are not getting their money back and they will unlikely make this mistake again. The primary attraction of the “managed default” plan to the European Union is that it will inflict less economic pain on Greece and as a result the Greece’s economy will fall less and recover faster than in a “default” scenario. The unanswered question is how much economic pain is required in Greece for necessary economic reforms to occur. That is probably why the European Union is asking Greece for budget veto power over the Greece budget. Considering the situations in Ireland, Portugal, Spain, and Italy are not far behind, maybe the authors will have enough material to write their next book about this never-never land for advanced economies, its pitfalls, and its benefits.
Yes, I know the authors collected a lot of valuable economic history but unless you get excited over lots of charts, it is a very dry read.
This Time Is Different: Eight Centuries of Financial Folly
by Carmen M. Reinhart & Kenneth S. Rogoff
Last year my wife had a spat with our son and decided that I should be ferrying my son back to college from now on. Although it involves a lot of driving I prefer to complete the round trip in one day. With all of that time in the car I have taken advantage of the local library and their supply of audio books. For this trip I chose two audio books, The Total Money Makeover: A Proven Plan for Financial Fitness and The Original Argument: The Federalists’ Case for the Constitution, Adapted for the 21st Century.
As a fan of the Dave Ramsey show the audio books was an enjoyable review of much of the same stuff you hear over the radio.
The Original Argument audiobook is an interesting Glenn Beck project. Glenn Beck and others have translated many of the original Federalist Papers from the 18th century English into an easier to understand 21st century English. The objective was to make the Federalist Papers more accessible to the average person and I think he achieved that. In this book we find Alexander Hamilton and James Madison making persuasive arguments for a more powerful federal government primarily because they felt a federal effort would be more efficient and cost less than independent state efforts. From their viewpoint it was a win-win decision for the country. Although I agree with Alexander Hamilton and James Madison about the benefits of a strong federal government, I think they would be shocked to see how the balance of power has shifted from the states to the federal government. Most of the safeguards for the state that Alexander Hamilton and James Madison described have been dismantled over the years. Not only are senators directly elected by the people but the states are increasing dependent on the federal government for their revenue as shown below. The culmination of this dismantling effort can be seen in the lawsuits over the constitutionality of the Affordable Care Act. This year lawyers will make many of same federal versus state rights arguments before the Supreme Court that was argued originally in the Federalist Papers. I doubt any of lawyers will attempt to make the argument that the Affordable Care Act is more efficient substitute or enhancement of existing state programs. The fact that the federal government can pay for the expansion via deficit spending is a bad reason to expand Medicaid. I would be more in favor of a practice that encourages responsible governing practices.
See this Cato essay on federal subsidies to the states for more on why it is critical to reverse this trend.
I have been reading This Time is Different: Eight Centuries of Financial Folly for the last month. It has been slow going since it reads like a text book and I have read my fair share of text books in my life. I would have given up except that the authors have some collected some important historical data about financial crises. The authors have methodically compiled approximately 800 years historical data base on financial crises and their causes. There are lots of tables, charts, and professorial comments about the causes of the crises.
A few days ago I was surprised when Henry Blodget wrote an article advocating more government spending in the article, Well, It Sure Seems Like Keynes Was Right, and based it partly on Reinhart and Rogoff’s analysis of prior financial crises. I was surprised since the authors did not comment directly about stimulus spending in the chapters I read but here is what Henry wrote:
And I’ve also looked back at history–namely, Reinhart and Rogoff’s analysis of prior financial crises, the Great Depression, Japan, Germany after Weimar, and so forth.
So I skipped to the end of the book and read the last two chapters. The closest I came to a comment on Keynesian stimulus spending is:
Debt sustainability exercises must be based on plausible scenarios for economic performance, because the evidence offers little support for the view that countries simply “grow out” of their debts. This observation may limit the options for governments that have inherited high levels of debt. Simply put, they must factor in the possibility of “sudden stops” in capital flow, for these are a recurrent phenomenon for all but the very largest economies in the world.
Our extensive coverage of banking crises, however, says little about the much debated issue of the efficacy of stimulus packages as a way of shortening the duration of the crisis and cushioning the downside of the economy as a banking crisis unfolds.
So although the authors are concerned about plausible debt sustainability scenarios since it may lead to “sudden stops” in capital inflow in smaller economies, their data has shown that large economies like the United States have been immune from these “sudden stops”. This leaves open the question of what would happen to capital inflows if the United States undertook another stimulus like Henry Blodgett is recommending. At what level of debt does the rest of the world decide that the United States debt is not sustainable and they should invest their capital elsewhere. If that scenario occurs we can safely say this time is different.
As a back-handed complement I would like to thank Henry for making the “This Time is Different” book much more interesting than it would be otherwise.
About two years ago I decided to read the entire Bible. There are many ways to accomplish this task and I chose a Daily Reading plan served up to my RSS reader courtesy of The ESV Bible. When I started my second round of reading the Bible I increasingly used the audio version. This was much easier on those days when I was tired, unmotivated, and procrastination seemed to rule the day. About a month ago I started downloading podcasts to my phone. I play the reading on my way to work. This had been a very pleasant and fulfilling way to listen to the Bible and take advantage of the lost time during the morning commute. I enjoyed this endeavor so much I decided to listen to free audio books in the afternoon commute. In the morning I listen to the daily Bible reading and in the afternoon I listen to my daily reading of Pride and Prejudice courtesy of AudioOwl. It seems so appropriate that Pride and Prejudice is read by a woman with a British accent.