Vigilant Investor

No doubt, there are quite a few problems behind why oil has jumped above $128 a barrel.  Never mind hooey arguments about greedy oil companies that resonate with the economic illiterates among the loudmouth media and the complaining voters.

While we don’t have much good to say about any politician on the matter of energy, we really can’t disagree with President Bush’s observations about pressuring the Saudi’s for more output:

“Our problem in America gets solved when we aggressively go for domestic exploration. Our problem in America gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancing of alternative energies as well as conservation,” he said.

“One interesting thing about American politics these days is those who are screaming the loudest for increased production from Saudi Arabia are the very same people who are fighting the fiercest against domestic exploration, against the development of nuclear power and against expanding refining capacity.”

This, said Bush, after noting that Saudi output really is not the ultimate solution to the U.S. price problem.  Mind you, many in the U.S. Congress are wagging their fingers at the Saudis — like candidate Hillary Clinton — for not increasing their production significantly enough to alleviate U.S. price pressures, as if the world should rotate around the U.S. dilemma.  The same folks giving grief to the Saudis are the same ones who refuse to allow the U.S. to develop its own energy resources as Bush notes above.

Not that the Republicans have been any great movement as of late to get anything done themselves, with R candidate John McCaine having been a pivotal vote in the Senate preventing the development of Alaskan reserves.  Indeed, the U.S. has not built a new refinery in three decades, and refuses to allow development of both oil and clean burning coal, not to mention nuclear reactors.  Even environmentalists are preventing air windmills, much to the happiness of those with fancy homes on the coasts who loath having their million dollar views ruined by windmill farms harvesting the constant ocean breezes.

Hypocrisy aside, we’re not hearing one of the core causes for skyrocketing energy costs: plain old fashioned inflation. And by “inflation”, we don’t mean the modern misuse of the word to describe the consequences of inflation — rising prices –, but rather the actual cause of the rising prices: climbing money supply.   The world is now awash with dollars thanks to a steady thirty years of the Fed and the U.S. banking system creating dollar after dollar with its fractional reserve, fiat privilege.

Looking at the money supply graph, you can see that the various measures of U.S. dollars have been on a steady rise since the 1980s, and especially ramped up in the 1990s.   Most were lulled to sleep about the ugly effects of inflation due to two factors, both of which served as siren songs for the unsuspecting public and the herd of sheep hitting their record bonuses on Wall Street:

1. Inflating nice asset prices like stocks, bonds, and houses
2. Exported inflation dollars bought cheap goods made abroad, a honeymoon that lasted until the last few years, when foreign nations were flush to the gills with dollars and ready to part with them to buy things that were not so easily printed and common — and very essential, like energy!

“Without a doubt, the measuring rod of money is broken. Indeed, money is loaned into existence by the Federal Reserve’s banking cartel. Fractional-reserve banking allows it to be created out of thin air. Who needs a gold standard for self-measurement when any adult with a pulse can borrow and spend hundreds of thousands of dollars on McMansions, luxury automobiles, flat screen TVs, country club memberships, and spare-no-expense vacations? What a wonderful life the Federal Reserve has brought to Americans! Easy money and credit bring immediate indulgence. As long as you have absolutely no fear of debt, you too can look extremely successful without ever having had to save a dime. Accordingly, this has given rise to America’s new insolvent class: the two-thousandaires.”

You can read the entire piece on the devolution of the American Dream from Karen De Coster here. Vigilant investors are taking note of the consequences.

After writing yesterday’s critique of lobbying by the corporate retirement plan industry to create more work for its members - at the expense of small businesses — I thought I’d touch on a similar example of messy government causing undue complexity, and wasteful allocations of our nation’s vast, but limited and declining resources.

Today’s example? 529 college savings plans. Regardless if you are a candidate for such a plan, I encourage you to read today’s dispatch through to its conclusion, because it illustrates perfectly a deeper, nationwide problem that is just one of the many reasons why we remain long term bearish on the U.S. economy.

On the surface ‘529 plans’ are a great idea (although it should always be kept in mind that had the government stayed out of the way in the first place, 529’s wouldn’t be necessary). Essentially, a 529 plan allows family members to contribute large amounts of money to the education of future students in a tax advantaged investment account. From a federal tax perspective, contributions are not deductible like an IRA or a 401k. However, so long as the money inside the account is used for purposes of broadly defined higher education, the money - gains and all - may be accessed tax-free to pay the related bills.

Sounds like a great, straight forward idea, right? Well, not so fast. Continue Reading »

When people wonder why so many jobs and businesses have moved abroad, often times they lay the full blame on U.S. organized labor… That, or they blame “greedy” corporate executives willing to sell America short just to earn a few extra million of (evil) profits…

What’s often ignored is the absurd regulatory environment the U.S. has created over the last 100 years. Unfortunately, folks

Since the founding of the country, a parasitic class of business owners and bankers has been working to lobby Congress to pass focused special interest legislation to benefit their business in some way or another. Books have been written on the subject (I recommend Rothbard’s “The Case Against The Fed” for a solid primer on the U.S. banking cartel as well as for its introduction to they type of lobbying that took place during the latter part of the 1800s for the purpose of establishing competitive barriers and other laws helpful to special interests.

In the meantime, you can give a read to a Washington Post article that covers the clumsy and destructive Sarbanes-Oxley Act of 2002. The law is a classic example of Congress failing to do what it had promised for its citizens (”providing a safe investment environment”), and then reacting badly by closing the barn door long after the cows had already escaped. Worse yet, it is a classic example of a failure to enforce existing laws that could have taken care of the problem. Worse, like most regulation, it treats all participants as guilty until proven innocent, while burdening the entire economy with a whole new layer of crimes of non-compliance without any relationship to actual fraudulent intent.

With the Sarbanes-Oxley anchor around the neck of the economy, it’s just yet one more very expensive reason to not set up shop in the United States. And, it’s another reason why Vigilant readers ought to be skeptical of the perpetually bullish choirs on Wall Street and on CNBC and other financial media.

Arbitrary complexity is the hallmark of the U.S. tax code. If you have the fleets of attorneys and CPAs to handle the load, most any company can make itself more competitive vs. smaller players without the critical mass to play ball. Of course, the tax industry — all those CPAs and attorneys — want the code to be as complex as ever, as well as ever-changing. For without a tax code whose pages stacked are over six feet thick, $ billions of fees would be gone overnight, forcing tax careerists making six and even seven figures navigating such complexity to get real, non parasitic jobs. That’d be a boon to the economy, as those $billions of dollars of troll-bridge tolls would be redirected to more productive purposes.

We could write for hours on the subject, but at this point we’ll just refer you to an MSNBC article that elaborates on the punitive complexity of the U.S. tax code.

Just remember the next time you see jobs going abroad that its not just big labor to blame for the inefficient economic environment that’s been arbitrarily created in the United States. And don’t forget what professions — and their lobbies– benefit the most thanks to the legislation that makes it happen.

We’ve been looking in disbelief at our government debt clock on the top right of our site, as it churns away. When we put it up just a few short months ago it was barely $ 7.7 Trillion, and the government was worried about the debt limit being at $8 trillion. Suddenly the debt clock took off, and for a moment I thought it was broken. But, alas, no such luck. Today we read, “Government Spending Hits Record in March,” with the Treasury Department reporting that spending totaled $250 billion in March alone, up 13.7% from the previous year.

Congress, never the fiscally responsible ones — after all, that gets in the way of buying off the populace during elections — is incapable of contemplating anything remotely obeying the laws of economic gravity.

So long as they win their next election, what is it to them if future generations are saddled with insurmountable debt or entitlement “promises” that are by any sane measure impossible to pay? They get to be political big shots dolling out $ billions, so who cares if the dollar is debased so badly thanks to the deliberate inflating of money supply? No different than any common counterfeiter, they spend freshly minted dollars (in cahoots with an officially ordained banking cartel called “The Fed”) that are backed not by hard work, production and growth, but instead by thin air. Each cent of purchasing power gained by this swindle comes directly out of the pockets of existing dollar holders and savers.

Most folks didn’t mind when all those fresh dollars pushed up; the stock market — their brokerage and 401k statements showed that they were growing wealthy. For a time some people even quit their boring day jobs and begin day trading their way to riches.

After the bubble burst in stocks, most folks grew worried — but not for long, as money supply began driving home prices up at paces well above average, and in some areas into the stratosphere. If the stock market was no longer making people rich, their homes now were. Again, many people quit their boring old jobs and took up as real estate agents or mortgage brokers. Some even decided it would be a good idea to get into the real estate flipping business, where you could buy a house without a penny down on an adjustable rate mortgage, and sell it a year later at 26% increase. Nobody seemed to care about anything with home prices going up so fast.

In either case, nobody bothered to check beneath the surface and find out why prices would suddenly go up so fast and so extreme compared to historically normal levels. Instead they were told by investment magazines and mainstream economists, and the Fed and the Government, that the United States had arrived at a new state of economic nirvana, where the old rules no longer applied. Deficits didn’t matter. Neither did opening the floodgates of money supply. After all, so long as CPI was under control and GDP looked good enough, all was well.

As the saying goes, inflation is lots of fun on the front side, when the good prices go up. But that can last only so long until it starts hitting the prices of things that are not so fun. Today people complain about greedy oil companies as the effects of bloated money supply show up mercilessly in the price of gasoline. They demand that “somebody (e.g. politicians) ought to do something about it”, completely oblivious that politicians already have with the money supply issue. (As well, most don’t realize that their politicians — through taxes –have the largest slice of gas profits of any of the players, from oil company down to gas station owners…but I digress…). As well, prices of other items have begun their slide upward.

Expect that trend to continue. The government has promised so much in dollar terms that the only way it can deliver it by debasing the currency to pay promises with unites of currency worth only a fraction of their original value. That’s the way it’s been done in every dominant global power, from Rome, to the French to the British Empire. The U.S. will be no different. The people will demand nothing less.

“It is our true policy to steer clear of entangling alliances with any portion of the foreign world.”–George Washington

“Friendship is but another name for an alliance with the follies and the misfortunes of others. Our own share of miseries is sufficient: why enter then as volunteers into those of another?”

“It behooves every man who values liberty of conscience for himself, to resist invasions of it in the case of others: or their case may, by change of circumstances, become his own.”

“Commerce with all nations, alliance with none, should be our motto.”

–Thomas Jefferson

When it comes to asset inflation, there’s no telling how much exactly wars and war talk drive up prices vs. other variables.

We’ve long talked about how the massive increases in money supply have slowly eroded the purchase price of the dollar and other currencies. But just the same, demand issues can also cause prices to go up, and demand issues can be related to war premiums –especially when it comes to oil.

That’s why when news starts leaking — a trial balloon perhaps — that the U.S. is considering strike options against Iran, including the use of tactical Nukes (Bush ‘is planning nuclear strikes on Iran’s secret sites’) …well… The markets tend not to like it:

That’s the price for being global cop. That’s the price for slouching towards empire. Oh, yeah — “times are different today”, we are told. But ask yourself why they are different, and are these times of our own making? After all, the Iranians didn’t prop up a dictator in the U.S. like the U.S. did in Iran with The Shaw. Those in the Mid East are not the ones forcing the U.S. to accept the creation of a new country populated by foreigners, carved out of a populated portion of the United States. But, that’s what the U.S. has done with Israel — which has been regionally viewed as a European Colony of Jews since its contemplation and founding.

Our critique is not to brand a specific policy as right or wrong. It is, however, to point out that actions have consequences, and after eighty-plus years of the U.S. getting its nose under the tent in the domestic issues of dozens of countries all over the world, all in the interest of “national security”, invariably you will have the threat of blowback. 9/11 was hardly an event not precipitated in response to official U.S. actions abroad, never mind the apologists who would have you believe it was in response to our “open and free society.” After all, Europe is a far closer target with its “decadent” nude beaches and far more open sexual liberality when compared to the U.S.

But to the point: As the saying oes, with each action there is an equal and opposite reaction. The motives behind those actions reveal an chasm of cultural differences and complex perspectives and priorities among the various parties, none of which can simply be changed overnight — or with idealistic policy initiatives, let alone smart bombs. To believe the situation will be anything other than worsened by attacking Iran is nothing short of naive.

Perhaps this is why our founding fathers admonished us to avoid meddling in the affairs of others, and instead pursue only purely trade-based exchanges with them.

But we have digressed. Our point started off with the economic issue of inflation. To that problem, we add the issues of unsustainable federal deficits and U.S. consumer debt of pandemic proportions. Viewed through that lens, we fear that the U.S. may find itself forced to rein its foreign policy more to the levels of what Jefferson and Washington suggested, if only for economic survival.

While dropping bombs on Iran may satisfy some out there, the Vigilant know that such puts us one step closer to more blowback, and one step closer to the rest of the world deciding that perhaps its time to stop feeding the debt hungry nation looking to rebuild the rest of the world in its own image. Again, that’s not a critique of that image. It is, instead, a resounding wake up call to keep in mind that those who are dependent on the lending of foreigners should not be recklessly indifferent to monitoring their lender’s views of said actions.

In politics, few things are about reality, and that holds true for the law just passed by Maryland that will required companies employing more than 10,000 folks to contribute 8% of their payroll costs to healthcare coverage or the Maryland state Medicare fund.Backed strongly by the big unions that hate the fact that Wal-Mart routinely satisfies most of its employees so that they turn down organizing. They also really hate the fact that the one shop in Canada that big labor managed to get a “yes to union” vote was promptly closed with Wal-Mart essentially stating that unionized labor does not fit their model.

So the organized labor when back to its only bag of tricks, and lobbied Big Brother heavily to step in to force Wal-Mart to do things neither it or the free market wouldn’t otherwise do. Progressive (who are really nothing more than re-branded collectivists) claim Wal-Mart was getting a free ride and was doing so on the backs of their competition. In truth, Wal-Mart is the only retailer with 10,000 employees in Maryland, and they will now be at a legislated competitive disadvantage compared to other retailers. The unions and politicians knew this, and the directed shot at Wal-Mart could be none more thinly veiled. Continue Reading »

Our first hand experience with friends and colleagues in the retail automotive industry tells us that domestic manufacturers are in a bind beyond just the financial elements we’ve talked about in the past week, ala GM’s flirting with bankruptcy.

Overall, Detroit’s major worries are making the news; and after The Big Three announced 60,000 job cuts in a week’s time, the nation should be watching automakers as a bellwether for the Great Society format U.S. economy as a whole.

More specifically, we should all note the various parts of the failing business model:

• Decades of overgenerous concessions / demands for organized labor.
• Benefit legacy costs consuming operating capital
• Short-term personal gain mentality from both management and labor, at the expense of long term reality
• Longer term models based on expectations that the pinnacle of economic cycles will last forever

Meanwhile, most government models, from the Federal down to municipal, tend to have operated with all these non-sustainable features — along with a whole host of others that are plain outlandish. From this, you’ll never be able to cut jobs or programs — even the most wasteful pork… And, don’t expect to union-bust anytime in order to get labor costs in line with reality. Plus, you can’t forget the addicted voter-citizen, who views the power of Congress to confiscate other’s property as his own check book / benefits provider — promises that grow and grow and grow, but remain largely unfunded and impossible to conceive how they will ever be long-term feasible.

There is little you can do — Except plan around it!

It happened some time during October, but the national debt crossed the $ 8 Trillion mark, standing on November 11 at $8.083 trillion. Divide that number by 2004 U.S. census population estimates, that’s a total of $27,526.73 per U.S. citizen, elderly and children included.

If it makes you feel any better, that’s $56,667.38 per employed individual as of October 2005. (What? It doesn’t??)

Yet there are those who dismiss any worries about the U.S. debt situation, noting that the National Debt to GDP ratio is in line…

If only the GDP was not so much of an indicator of the willingness of U.S. consumers to pile up debt and consume beyond their means.

We’ve talked a bit about Airlines and USAirways lock on the Pittsburgh in the past.

As a follow up, it was interesting to learn via an article originally published in the WSJ that Pittsburgh fares are dramatically lower (business fares by 19.1%) thanks to the end of the USAirways Pittsburgh Hub. As such, travel is up dramatically as new and discount airlines, like Southwest, took over the gates once held in the grip of USAirways. So, the Airport is bustling with activity, and the dire predictions of the end of the world — and the airports AirMall — were all gloom and doom predictions gone wrong.

We all ought to get a bit sicker when we start to think about how many tens of millions of dollars of taxpayer money and breaks were sunk into keeping USAirways in the region over the last few decades.

So, weep not for USAirways. Weep for the region that suffered along with it.

With all that talk of greedy profiteering of the Oil industry, I found this headline a hoot.

Not for BP or the consumers who will absorb this cost, but for the fools who are recommending we tax oil companies extra when their profits increase after years of sub par profits. As we posted several days ago, the oil industry averages profits very much in line with other industries.

Tom Delay of the Republicans is suggesting that any further cuts in the budget would result in cutting to the bone. Yep. That’s your conservative party, settling for astronomic growth including the fattest, pork filled highway bill known to man.

In a roundabout way, Pat Buchanan criticizes the GOP for being the very party it purpoted to “throw out” in 1994. Say what you might about Pat, his numbers tell the tale few politicians bother to note.

His solutions, if anything, are far too modest to save a ship taking as much water as ours.

In the meantime, this does not mean our readers need play along with fiscal insanity of their own. Too many folks spend far more than they should, and they will be left in trouble should this country hit hard economic times. It has happened before, and it will again. That is a certainty. Save more, and invest with the current fiscal insanity in mind. In 1999 I told people that, with the dot-com’s, these would be stories we will tell our grandkids. The dot-com’s may be gone, but much of the fiscal insanity is not.

‘If the law supposes that,’ said Mr Bumble…’ the law is an ass - an idiot.’
–Charles Dickens

At my investment practice, we endure ever more cumbersome compliance requirements that not only treat those in our industry as “guilty” until proven innocent, but are also — simply — counterintuitive to helping our clients reach their objectives.

Here is an article detailing some of the garbage that is going on in our industry. This is hurting retail consumers since those in our industry who are trying to help are forced, instead, to spend countless hours each day wasting time complying with excessive regulation.

Meanwhile, there are some politicians who will claim that nobody is willing to help the little guy with not a lot of money, and so therefore the government must step in to fill the void. Well, Mr. & Mrs. Know it All Politician — you fools created the environment where those helping smaller clients cannot operate profitably.

The only winners in this mess are:

-Those with law degrees. (funny how this always seems to be the outgrowth of regulation…created by those with law degrees…)

-The mega investment firms that can absorb the costs of hiring swarms of compliance attorneys, and actually support making the barriers to competition as high as possible. Oh, and these companies were the ones doing much of the fraudulent stuff that caused the most recent overreaction by regulators.

-The Regulators who get paid to regulate - - it is big business these days.

-Prosecutors, who advance their careers not by finding actual criminal activity, but, rather, paperwork errors and compliance misdeeds.

-Politicians, who now have another bogeyman to use to scare citizens to vote.

As Dickens also noted correctly, the one great principle of the law is, to make business for itself.

You gotta’ love Chuck!

Recently, and once again, I was lobbied by an organization with whom our financial firm had been affiliated in order to help our clients with insurance needs. Theoretically, I am off their mailing lists since our leaving the relationship some months ago, but for this important blast email I was asked to take action immediately regarding the pending legislation in Congress regarding Estate Tax repeal.

Given that the organization catered to firms like ours, who in turn assist quite a few clients whose estates fall into the crosshairs of the federal estate tax, one might presume the call to action would have been on behalf of those clients — to rally to have the estate tax repealed so that our clients would not have to jump through extraordinarily expensive hoops in order to keep their property from having to be liquidated at death, and distributed to the IRS as the largest beneficiary. After all, as advisors to our clients, we are to have their best interest in mind in all our actions. Anything else would be a conflict of interest and unethical, or so I am lead to believe.

If that’s what you expect, then you don’t understand the parasitic nature of our economy these days. Continue Reading »