All,

Take a look at this article published today by Jim Cramer.  Although he's a democrat and was a supporter of Obama in the beginning, he has reversed course over the last year after viewing the destructive attitudes of the democrats (and some republicans who have gone along with them) in power.  Then read my comments after the article:

Cramer: Obamacare Will Topple the Market

Either the market doesn't care that the health care bill will pass -- and it will -- or it doesn't think that the proposal will cost that much -- something I think is nuts. Which brings us to a very tenuous crossroad: We have to wonder if this is one of those occasions, like in 2008, where the market doesn't see the coming catastrophe. Or perhaps the market sees any resolution as positive.

>>Here's Your Portfolio If Obama's Agenda Wins

I don't. I think when the health care bill passes -- and it will pass, I believe, because Nancy Pelosi has worked diligently behind the scenes to bend the anti-abortion foes, the key votes, to her will -- the president will get a second wind. That means the whole agenda -- cap-and-trade, Card Check for easier organizing (something that Wal-Mart's (WMT) inability to move even on its dividend boost tells you is coming) and amnesty for immigrants who are currently not citizens -- will quickly come to pass, perhaps even before the election. To pay for these items I see a dramatic increase in ordinary tax rates and perhaps capital gains and dividend tax rates in 2011 either reaching or exceeding those ordinary income rates as this current version of the Democratic Party believes that only rich people own stocks. (That's been a hallmark from Day 1 with this administration.)

Given those hurdles, which include a suicide pact with financial health for small businesses that obviously can't afford health care without risking the capital formation necessary, I think you have to put the double-dip recession back on the table.

Those who have read me here and watch "Mad Money" know that I was out there early thinking that 2010 would not produce a double-dip, despite ample commentary that it would. But if health care reform passes, I am going to revise my thinking -- and you know I think it will -- especially because immigrant amnesty will cause the health care system to be overloaded and our taxes to soar.

The stakes seem so high while the market appears so complacent, perhaps because none of the levies will pass until 2011. To me that's around the corner. It's been slightly more than a year that I have been bullish. That's hanging by a thread this week.

Obamacare cuts that thread. Even if the market doesn't seem to know it.

At the time of publication, Cramer had no positions in the stocks mentioned.

I have had this sentiment for a while, and back in January began scaling down positions, moving to cash.  I will continue to do so ahead of this vote, especially with the Dow now sitting at 10,700.  This seems like a good level to take some money of the table and wait to see what congress decides to do.

My dad recently asked me what direction the market might be going, and to be honest, I don't know any big professionals that I read who have much to say on it right now either.  That being said, while it is hard to get any direction in most sectors of the economy as we await the decision in DC, I think one sector that will do well regardless of what happens is the energy sector.  So if you still want to have some money in play, I would think investing in mutual funds, ETFs, or stocks in the energy sector might be a good idea.  In my view, if Obama wins and gets health care, he'll probably get Cap and Trade, which will make energy stocks go up.  If he loses, energy should still go up because the economy should improve. 

And anyway, Energy stocks, especially those with direct holdings in the commodity, gain value the longer the Fed keeps the interest rate depressed.  As well, OPEC is not backing down on supply restraints, so oil should hold up and increase in price as demand continues to increase, and production continues to fall.  One big player in the price right now is the drilling failure rate which is up dramatically over the last year.  That makes oil more expensive to produce, making the future price go up, meaning if you hold a share in the actual fields producing oil the value of that oil in the field increases.

My favorite energy stocks right now are Royalty Trusts and Master Limited Partnerships, or basically anything with either direct holdings in oil or gas reserves or companies that own the pipelines for distributing it.  Royalty Trusts and MLPs also pay very nice returns that have tax benefits, so their values hold up better even if the market moves against you.  Right now some RTs are distributing about 1% per month (12% annually) which is a great return.

Mutual funds and ETFs in this sector are also a good idea, just be sure they have exposure to natural gas and good oil companies like Devon Energy, Enbridge, and MLPs and RTs as part of their overall holdings.

Good luck out there.  And don't wait for Obama to mess things up market wise.  Right now the markets are showing no true direction and that is always a good time for some profit taking regardless of your overall market sentiment.  But as I said, a lot of the pros are becoming worried there might be a pullback, or worse, a double dip recession.  And cash is always nice to have to buy the dip when it happens.

Tijs Limburg


Blogs:
http://phystrings.blogspot.com/
http://getoutofthedark.blogspot.com/

The Fed's Money Printing and Quantitative Easing

I've heard a lot of complaints over the spending bills, bailouts, etc. from the recent Tea Parties and most of it I agree with.  However, I disagree with the popular idea of Tea Party participants

that the Federal Reserve's Quantitative Easing policy is the problem - hardly so.  Quantitative Easing, or "Printing Money" in simplistic terms, is doing two things for the economy that investors and businessmen LOVE.  Just like a tax cut, QE reduces the interest rate, and thereby distributes wealth from the powerful banks and investment institutions to the businessmen and entrepreneurs.  Or should I put it differently as diverting wealth from the powerful banks and investment institutions and into the businesses they own. Lower interest thereby reduces the expenses on businesses and consumers.  It also reduces inflation - in the short term - by keeping prices moderated (businesses don't feel the need to increase prices when their expenses have been reduced), but at the same time stems deflation - which is absolutely the end all of economic disasters. 

You may wonder how QE policy can put the spending power in the hands of businesses rather than banks.  Steve will know the answer to this one.  Businesses and businessmen look at the interest rate as an opportunity cost standard for whether a business should simply earn interest on a bond investment, or whether they should make a capital investment and wait for a future return.  By reducing the interest rate (called "Printing Money"), the opportunity cost of capital investment is reduced, and the incentive to invest in a bond for future interest payments is reduced.  Therefore businesses would rather spend money upgrading.  It also has to do with present value of money.  By reducing the interest rate to zero as the Fed has done, the future value of money in nominal terms will be the same as the present value.  This is based on the equation Pv=S(1+r)N Where Pv is present value, S is the principle amount invested, n is the time in years, and r is the current interest rate.

Here's an example.  The value of 10,000 dollars in three years at a 5% interest rate is:

=10000((1+.05)^3)

=11600

So in 3 years at a 5% interest rate, the value of 10,000 is 11600.  So if your expected ROI on a 3 year investment is less than 11600, you should just put it in a bond at 5% and forget investing in capital.  Also, this means that if 10,000 is worth 11600 in 3 years, it will theoretically take 11,600 to buy something that was worth 10,000 in today's current money value.  But if the interest rate is closer to zero as it is now, 10,000 today is still 10,000 tomorrow, both in quantity and money value.  This theoretically gives enormous incentive for investment in capital goods.  And capital goods are the core drivers of our economy.

So this easing policy is much like a tax cut, but from the Fed rather than the government.  However, the government should also be reducing taxes and expenditures while the Fed does this over the long term.  Short term it may make sense for the government to spend more, since they can get cheaper bonds.  The problem is the government already had enormous debt BEFORE the crisis.  So spending any money they don't have is dangerous.

The only caveat to Quantitative Easing is that you have to be very good at judging when inflation is back to normal from zero, or when GDP is positive from negative.  If you don't time it right, inflation will be more than normal.  This is based on the Fed's money calculation MV=PQ.  Increases in GDP raise the PQ side, and therefore to remain proportional, the Fed needs to increase the money site proportionally.  V is a constant velocity of money, and P for prices in the economy normally should stay the same to avoid inflation.  However, if GDP (prices or quantity) are decreasing, the fed can theoretically increase MV to force an increase in PQ.  It is leaving the large amount of money on the table for too long that increases P too much, causing inflation.

Also, one has to take into account Gregory Mankiw's new theorem (Mankiw is a conservative economist at Harvard) that inflation is only a problem if it outpaces average raises in wages.  Think of this:  Businesses normally don't give raises based on performance.  They have bonuses and promotions for that.  Most raises are usually "in line" with or a bit above the interest rate.  This means from year to year, the average worker maintains the same buying power, while GDP increases the quantity of selection as more and better products and services enter the market.  This means that you have more to purchase tomorrow or next year with the same purchasing power (because the quantity of dollars available to you increased through a raise). 

Currently, raises (if your company hasn't suspended them yet) are still outpacing inflation, which is somewhere near zero, or even slightly negative.  Even if you got no raise, it is still in line with inflation since it is at zero. Once the economy recovers, most companies will give raises that are larger than normal to "make up" for the previous suspension, while hopefully the inflation rate stays below or around 4%, which will maintain a slight increase in purchasing power that we have been used to since Reagan. 

Maintaining a 4% or lower inflation is the trick the Fed has to ensure.

Check out Mankiw's blog: http://gregmankiw.blogspot.com/ or this other blog by James Hamilton http://www.econbrowser.com/archives/2009/03/quantitative_ea_1.html

Now I want your dissertations and dissentions!

Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com

Blogs:
http://phystrings.blogspot.com/
http://getoutofthedark.blogspot.com/

The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.

Thoughts on the KEYNESIAN FALLACY

My Two Cents

Interesting that Dick Morris would bring up John Maynard Keynes in his article.  We just discussed Keynesian Economic Theory last night in my Macro Economics class.  What I find interesting about Keynesian Economic Theory, is that the focus is more on demand management than the Smith-like theories of self-interested consumers being the drivers of the economy. 

One must ask, why does Keynesian Economics crop up every time there is a recession or depression, and why do we always return to the long debate between "trickle-down effect" and Compensatory Government Stabilization policy during these times?

In my opinion it is largely due to the fact that spending effects of "trickle-down" tax rebates to consumers are extremely hard to predict.  Economists can no more say that one person will put their check into a purchase of a durable good (tv, refrigerator, car, etc) than into savings (bank accounts, paying off debts, or investing in stocks).  And the effects of Compensatory policies can take years to evaluate and have very few control features for the measurement of success.  Take a look at the recent tax year of 2008.  We've had opportunities to examine both types of policy.  We had a tax rebate for consumers and an additional tax deduction for Capital Investment from businesses.  Neither has worked much in the way of stimulus to this point.  Most Americans used their stimulus check to pay down debts as did most businesses.

We had 350 Billion (and much more injected from the Fed) of Government spending, which all of the analysts are saying ended up in savings as well, not in stimulus.  I think Paulson made a huge error in bypassing the heart attack by purchasing equity in the banks rather than stinting the arteries to remove the blockage by purchasing and holding the bad debts.  That's where Reganists got the S&L issue in the 80's correct. 

In other words, the way I'm evaluating the current situation is this: While normally consumer and investment control are the best policies, putting too much control in the hands of a fearful consumer equates to increased savings.  Putting too much control into semi-nationalization of firms and investments equates to increased savings.  Expenditure GDP is based on four components: Consumption, Investment (Capital Investment), Government Expenditures, and Net Exports.  We've discuessed the first two and found the net result to be toward savings.  There are only two parts left in the overall GDP equation:  Government Expenditures and Net Exports.

We've used government consumption in one form or another in nearly every economic downturn including the Great Depression, and the results are arguable as to their success; I am one to believe they mostly worked in each case, some more than others (I believe the Republican based expenditures worked better than their Democratic counterparts).

So why don't we figure out a way to do something untested, and revitalize our Net Exports?  To me, that is the part of the equation that has gone unnoticed, yet in my mind has great untapped potential to energize the economy, create jobs, and transfer large sums of wealth back into the US economy.  In my mind, there is a key difference between our situation now and the situation in the early 1930's.  In that time the economies of nations were not nearly as global.  Today they are, and if you look around, all of the economies in the world are trying to lean on government spending to increase GDP and swing things around.  Today's globalized economies are all after one thing: economic equilibrium.  All of which is a good self-interested ideal, but in the context of game theory, this "co-operation of nations" to spend their government capital would be something close to Nash Equilibrium.  Nash Equilibrium does not always stand to benefit the whole group, and if one player finds a strategy that can break from this equilibrium, they can usually make the biggest gains. So, if every player in the global economic game has tried and is trying manipulations of the first three GDP components, naturally I think that everything we do in an effort to remake our economy should focus either implicitly or explicitly on increasing the Net Export number - beat the competition to increased exports, and we win the game.  Somewhat of a Net Exports "Arms Race".  Who really cares right now how much we sell to each other domestically.  We can sell insurance to one another all day but if there is nothing to insure it profits no one.

How can we increase the Net Exports component of GDP?  Create a revitalized financial system that foriegn investors are attracted to investing in (import currency holdings (not loans), export financials), produce and use more domestic energy (decrease energy imports), export energy resources, aquire foriegn companies (exchange of currency, export of business processes), help "manufacture ready" products and projects get to market (export products other nations need but don't have), create new breakthrough technologies (export US made technology), create and export US made media demand, export "Value Added Products" (especially ones that use materials that can be created easily within our own economic borders), etc., etc. 

I think the biggest component of Net Export revitalization would be to export energy and energy resources that are new and high tech, and that are produced by technology that only the US has, or harvesting energy resources from places (such as space) that the US has superior control over. 

Here's to winning the GDP race of the 21st century. 

Tijs Limburg

KEYNESIAN FALLACY

By DICK MORRIS

Published on TheHill.com
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50aGVoaWxsLmNvbS8%3d&x=be99d77b>  on February 3, 2009

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There are very few economists who really buy into Keynesian theory
anymore. Instead, the idea of "rational expectations" has taken its
place. The difference between the two approaches is essential to
understanding why Obama's stimulus package won't work.

Keynes felt that people would react automatically to a few dollars in
their hands. Consumers would run out and buy new products, and
businessmen, seeing the uptick in sales, would rush to open new plants
and hire new workers who would, in turn, generate more demand.

But that's not the real world. In reality, consumers, knowing there are
hard times ahead, save any money they get either by salting it away or
by paying down their debts and bills. That's why the personal saving
rate in the last quarter of 2008 was the highest in six years and
spending on residential construction was down 22 percent over the past
year. And the savings rate rose from 2.8 percent in November 2008 to 3.6
percent in December as the storm clouds grew grayer. And, in the real
world, banks hang onto their money for fear of making bad loans, no
matter how many bailouts or stimulus packages Washington passes.

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According to the Federal Reserve Board of St. Louis, the Fed is now
holding upwards of $1.7 trillion for American banks, more than twice
what it had in its vaults at the start of 2008. How did the Fed get the
money? Congress voted the Troubled Asset Relief Program (TARP) package
of bailout funds. The Fed purchased bank assets to get liquidity onto
their balance sheets. What did the banks do with the money? They gave it
right back to the Fed to hold in its vaults. They didn't lend it out.
They didn't use it to stimulate the economy. They are using it for a
nest egg to tap when times improve. Just like the theory of rational
expectations says they would.

If banks, suddenly awash in capital, don't decide all is fine and rush
to lend money; and consumers, given a tax cut or a pay raise, don't rush
to buy a flat-screen TV, then what good will the stimulus package do?


Not much. It is not until there is evidence that the underlying problem
-- massive personal and corporate debt -- is being solved that any
degree of confidence will return. And, without confidence, the rational
expectation theory means people sit on their money.

But the package will do a whole lot of harm by piling up capital that
people won't spend, banks won't lend and businesses won't invest. When
confidence rises and the money comes out of hiding, watch out for the
massive inflationary pressures all that extra cash will unleash.

Obama's stimulus package won't stimulate much except inflation down the
road, which will, in turn, mean the onset of another round of high
interest rates and renewed recession to check the inflation.

Republicans should defeat the stimulus package and then negotiate a much
smaller bill that emphasizes tax cuts and avoids the pork-barrel feeding
frenzy Obama has unleashed. You can see the stimulus package rotting
away before our very eyes.

People are turning against it as they see the things on which government
will now be spending money, just as they turned against Clinton's more
modest $35 billion stimulus package in 1993. Republicans should stay
away in droves. On this issue, they can recapture something they have
lost over the past eight years -- the mantra of less spending and
smaller government.

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Ron Paul - A Disaster for America

Ron Paul's Ideas Illogical

It was when I first heard of Ron Paul rejecting the idea of international trade and wanting to block trucks coming north from Mexico from entering the country, which is now allowed, that I wondered why he would attempt to run for president.

I then heard him say that the Federal Reserve was unconstitutional, unnecessary, and the cause for the "worthless" dollar.  I say worthless because his statistic of the dollar being worth 4 cents for every 1920s dollar would make everyone think just that.

However, consider this.  We have all heard our grandparents tell of a bottle of coke costing $0.05 in 1920.  This is confirmed by most recorded accounts. (see http://www.foodtimeline.org/foodfaq5.html#cocacola)  

Sounds pretty cheap, eh?  Especially compared to the price of a similar bottle of Coke at $1 today.  However, further analysis proves sightly different.  Many analysts estimate the average wage in 1920 to have been somewhere around $30 a month.  So lets estimate that to $1 a day in 1920s dollars.  To buy a Coke, it took 5% of your gross daily income.  

In today's terms, let's use the minimum wage of $5.85 in today's dollars to compare to the daily wage of $1.  Working a full time job at minimum wage, you would earn $46.8 gross.  (It should also be noted that many workers in 1920 probably worked longer than 8 hours a day.)  So in those terms, the cost of a $1 Coke of today takes just over 2% of your daily gross income to buy.  In effect, the cost of a Coke today is 238% less than it was previously.

Which would you rather have?  A Coke for $0.05 costing 5% of your daily wage, or a $1 Coke costing 2%?

Another argument that Ron Paul brings to his campaign is the idea of doing away with the Federal Reserve.  Such a move would be ridiculous.  Since its formation in the post 1929 crash era, the Federal Reserve has insured that we have not suffered  a depression as the one experienced at that time.  This is even more important considering the 1987 Crash -Of which this current month is the 20th anniversary. 

The 1987 Crash was the worst in US history.  The Dow fell a whopping 23% in one day, out-shadowing the 1929 Crash.  However, the Federal Reserve was in large part responsible for keeping the economy from going into a depression.  In fact, if you were to have bought shares after the 1987 crash, you would likely be up ten fold today -A much different result than in 1929, when by July of 1932, the Dow had lost 89%, and did not close above the peak level in 1929 until nearly 25 years later in 1954.

How can someone who is running for president justify his stance on dissolving institutions such as the Federal Reserve?  And more disturbingly, how can even 1% of the Republican voters be following him? (according to the latest Fox News poll.)

I think the economy will develop into a very important issue for 2008.  I just hope that the rest of the 99% of voters, republican or democrat, will be more informed of the workings of economics.