“Investing and speculating are widely confused. Investing is “to allocate capital into productive activities with the anticipation of operating profit.” Speculation is “to allocate capital in order to profit from politically caused distortions in the market place.”

If you can think of any counter-examples, please let us know!

Want to hear a real laugher? Despite the current disharmony in politics, there’s one policy on which all of Washington agrees. Republicans and Democrats, House and Senate, president and Congress all agree that after last fall’s financial crisis, the federal government has to regulate the financial industry more closely to protect our economy from risk of systemic financial collapse.

Here’s the joke. As boom- and bust-prone as high finance always has been and remains, the greatest systemic risk to our economy is not Wall Street. It’s the growing federal debt (and weakening dollar) being enacted by those Washington politicians — the ones who want to protect us from Wall Street.

The piece was written by Tony Blankley and you can read it here.

Our financial situation is breathtakingly unsustainable. You really need to pay attention to preserve and grow your capital.

]]> http://www.rocketcap.com/the-largest-systemic-risk-to-usa-economy-our-federal-debt/feed/ 0 http://www.rocketcap.com/cutting-government-spending-is-impossible-and-the-politicians-know-it/ http://www.rocketcap.com/cutting-government-spending-is-impossible-and-the-politicians-know-it/#comments Tue, 29 Sep 2009 04:06:44 +0000 admin http://www.rocketcap.com/?p=1583 Bruce Bartlett is a former Treasury Department economist. Writing in Forbes Magazine, 9-18-09 he notes:

Domestic discretionary spending amounted to $485 billion last year. With a deficit last year of $459 billion, we would have had to abolish virtually every single domestic program to have achieved budget balance. That means every penny spent on housing, education, agriculture, highway construction and maintenance, border patrols, air traffic control, the FBI, and every other thing one can think of outside of national defense, Social Security and Medicare.

This means that it is impossible to get control of spending without cutting entitlement programs. Many Republicans agree, but they never make any serious effort to do so. On the contrary, they defend entitlements when Democrats suggest cutting them. The Republican National Committee has run television ads opposing cuts in Medicare because Obama proposed using such cuts to fund health reform. Many demonstrators at right-wing tea parties were seen carrying signs demanding that the government keep its hands off Medicare.

This reality is actually old and well-known. But it’s wise to review this stark fact from time to time if you care about your long term financial future and appreciate the enormous impact in our economy by the federal government.

Geo-politics assumes two things: first, that human beings organise themselves into units larger than families and that they have a natural loyalty to the things they were born into, the people and the places; second, that the character of a nation is determined to a great extent by geography, as is the relationship between nations. We use the term “geography” broadly. It includes the physical characteristics of a location, but it goes beyond that to look at the effects of a place on individuals and communities. These are the foundation of geopolitical forecasting.

Opinion and reputation have little to do with national power. Whether the US president is loathed or admired is of some minor immediate import, but the fundamentals of power are overarching. Nor do passing events have much to do with national power, no matter how significant they appear at that moment. The recent financial crisis mattered, but it did not change the basic geometry of international power. The concept of American decline is casually tossed about, but for America to decline, some other power must surpass it. There are no candidates.

Friedman is CEO of Stratfor, Inc., a commercial intelligence operation based in Austin, TX. His article in the New Statesman on 27 AUG 09 is fascinating and  illuminating. It briefly describes how geo-political constraints can bring about a strong partnership between Poland and USA.

We also read his book, “The Next 100 Years” which gives more details and intellectual backup for his ideas. One of the more interesting claims Friedman makes is that Turkey will become a real economic powerhouse. Now, Turkey has the #17 ranked GDP, while Poland has #18. Interesting, yes? The ETF for trading Turkey’s economy is TUR. Note how it has risen over this summer….

Scenario Planning is an important component of strategic planning for any corporate or government organization that intends to prosper and succeed over time. It applies to individuals, too. Of course, it applies to investing as well.

Wired magazine published a clear, concise description of how to do Scenario Planning for yourself. The author, Peter Schwartz, is one of the pioneers in the field. He uses an example of an aerospace engineer planning for his career in quite uncertain times.

Read the Wired Magazine Article

We speculate the intelligence organs as well as the commentariat in USA and elsewhere complacently assumed the Iranian elections would be rigged. After all, every candidate was pre-approved by the boss mullah. The fact that the proletariat in Iran rose up against what everyone assumed would occur is the Black Swan Event. A BSE has the definitional properties that it has very high impact, is exceptionally unlikely and can be explained only in hindsight.

The subtlety is this: Our BSE may not be yours. You may have special insight leading you to expect my BSE. An example: John Paulson saw the credit collapse coming and massively invested his hedge fund in shorting the bank stock index. He made billions of dollars for his fund and himself…while the rest of us were running for cover.

So now we ask: were our intelligence agencies expecting this BSE? We doubt it.

Mei Gechlik (JSD, MBA) is Lecturer in Law at Stanford Law School, where she also is Microsoft Rule of Law Fellow. She is fluent in Mandarin and knows the Chinese business scene. She has generously agreed to let us publish her analysis of the recent action by China. Here it is.

By Mei Gechlik

Stanford University

18 JUNE 09

Earlier this month, China’s Ministry of Industry and Information Technology (MIIT) made available a notice dated May 19 to require that from July 1, all personal computers (PCs) sold in China be preinstalled with a program that, according to the MIIT, filters harmful information.  The notice has drawn widespread criticisms that the Chinese government attempts to invade privacy and restrict freedoms in the name of creating a “healthy and harmonious Internet environment”.  Should PC producers rush to meet the requirement by July 1?  No.

First, the MIIT’s notice is, like many other Chinese rules, vague.  It does not specify that penalties will be imposed if the “Green Dam Youth Escort” (Green Dam) software is not preinstalled by July 1.  It only provides that any failure to meet the requirement should be corrected (改正, gai zheng).  Rushing to comply with such a poorly drafted and once secretive notice sends a wrong signal to the MIIT that PC producers do whatever it takes to increase their share in China’s PC market, which sold 40 million PCs last year and is the second largest in the world.  PC producers’ speedy compliance without any attempt to seek clarifications from the MIIT would encourage the MIIT and other ministries to take more drastic steps at their whim, leading to a more challenging business environment for local and foreign enterprises.

Second, the MIIT seems to have backed off because of growing pressure inside and outside of China.  In China, many netizens have questioned the MIIT’s ulterior motives of forcing every PC user to have a program that can, according to experts, turn every PC in China into a part of a botnet, a network of hijacked computers that the hijacker can manipulate.  Even people working for government-run institutions have openly expressed their concerns.

In particular, Li Fangping, a Beijing rights defense lawyer, has formally challenged the legality of the MIIT’s notice.  His main argument is that the notice concerns vital interests of the people and the failure of the ministry to hold a public hearing on the issue violates an October 2008 directive jointly issued by a few ministries including the MIIT and approved by the State Council, China’s highest executive organ.

Li further relies on China’s rules on open government information to demand the MIIT to, among other things, make public the “financial application and approval procedure” for spending RMB41.7 million of government funds to purchase the right to use Green Dam for one year.  At issue is that the MIIT entered into a contract with Jinhui Computer System Engineering Co., the developer of Green Dam that is linked to the People’s Liberation Army, China’s military, without going through any transparent bidding process.

Li also asks the MIIT to explain whether ordering all PC producers to install the software may have violated China’s Anti-Monopoly Law.  The law prohibits administrative authorities from abusing their power to eliminate or restrict competition.  Why is Green Dam, the effectiveness of which is challenged by experts, picked when the market offers other anti-virus software that can effectively block harmful information?

Pressure outside China takes the form of not only criticisms against the Chinese government’s Internet censorship but also lawsuits against Jinhui.  Solid Oak Software Inc., a California company, has alleged that Green Dam contains components stolen from its software and vowed to stop U.S. PC producers from shipping computers with Green Dam to China.

In an attempt to alleviate concerns, the MIIT spokesman has reportedly clarified that PC users can choose to uninstall Green Dam.  It remains unclear whether the MIIT will revoke its May 19 notice.

It is not unusual for the Chinese authorities to back off from their unreasonable stances after strong public opposition builds up through the Internet and the media.  In 2003, the State Council abolished the notorious “custody and repatriation” system to stop condemnations spreading rapidly across the country after a young migrant who failed to present ID documents was beaten by the police to death when he was locked up to be repatriated to his home town.  Earlier this week, a local court decided to set free a young woman who killed an official and wounded another to defend herself from a rape attack.  The woman was first arrested for murder.  Had the incident not been extensively covered by the media and the Internet, the court decision would have been different.

Given that the MIIT is subject to such enormous pressure, PC producers inside and outside of China should seize the opportunity to add their voices.  Apart from legal arguments, they should remind Chinese leaders that a highly-controlled Internet system is not conducive to the proliferation of ideas needed if China is serious about becoming an innovative country by 2020.
Twenty years after the 1989 crackdown of the student protest at the Tiananmen Square, Beijing has yet to review the crackdown and correct its own mistakes.  Instead, it continues to restrict freedoms in the name of creating a harmonious society.  Chinese leaders should know from history that China was the strongest when its society was tolerant, not when it was harmonious.

Then president today spoke to the American Medical Association meeting in Chicago. According to the NY Times( p1, 6-15-09):

“The public option is not your enemy,” Mr. Obama said. “It is your friend, I believe.” Saying it would “keep the insurance companies honest,” the president dismissed as “illegitimate” the claims of critics that a public insurance option amounts to “a Trojan horse for a single-payer system” run by the government.

Mr. Obama twice referred to the use of such “fear tactics” about “socialized medicine” in past legislative battles, without pointing out that the A.M.A., a traditionally Republican-leaning group, was among those using the charge, as in the mid-1960s debate over creating Medicare for people 65 and older.

Let’s examine this. First, the veiled claim that the insurance companies are dishonest because they lack real competition is fantastic. There are already over 1000 competing insurers, and if there were a private monopoly, we are certain the Anti-Trust Division of the  Justice Dept. would be having a frenzy of prosecutions. Lack of competition is a non-issue.

Second, Mr. Obama has continually made statements that are direct contradictions to what he actually is doing, brilliantly packaged statements, but fully deceptive. Consider his quotes above. The reality is this: any form of goverment competition with the private sector will, as surely as the sun rises in the east, become a collector of everyone’s medical coverage, all quite voluntarily. Why? Simply because the government’s costs are already subsidized by you the taxpayer, and so it will inevitably promise more service for less premiums, luring people in. Then the private insurers will fail and only one insurer will remain. Uncle Sam.

Third, the republicans who said Medicare would become socialized medicine were right. That’s what Medicare is. The single payer is Medicare for those over 65.

We are in for some truly life-altering decisions about health care and the economy. Mr. Obama is urging fast action for a final bill, thus ensuring inadequate analysis and weakly discussed counter-proposals to his ideas. This unnecessary desire for speed to change the extraordinarily complex health care system will shut off public debate and give us an obscenely bloated set of new laws, new spending, and unintended (but fully expectable) unknown and damaging consequences…called Black Swans.

]]> http://www.rocketcap.com/is-obama-trying-backdoor-socialism/feed/ 0 http://www.rocketcap.com/inflation-seems-inevitable/ http://www.rocketcap.com/inflation-seems-inevitable/#comments Wed, 27 May 2009 16:30:50 +0000 admin http://www.rocketcap.com/?p=723 We so often hear the claim that inflation will emerge from the current monstrous federal spending that we get a bit numb and complacent. Read the article below by Prof. John  Taylor, a highly respected Stanford University economist. If this doesn’t pierce your veil of comfort, only the ultimate reality of inflationary prices will.

Exploding debt threatens America

by John Taylor
Published: May 26 2009 20:48 | Last updated: May 26 2009 20:48

Standard and Poor’s decision to downgrade its outlook for British sovereign debt from “stable” to “negative” should be a wake-up call for the US Congress and administration. Let us hope they wake up.

Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

“A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,” as the risk rating agency stated last week.

I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.

Why might Washington sleep through this wake-up call? You can already hear the excuses.

“We have an unprecedented financial crisis and we must run unprecedented deficits.” While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession. Such thinking is irresponsible. If you believe deficits are good in bad times, then the responsible policy is to try to balance the budget in good times. The CBO projects that the economy will be back to delivering on its potential growth by 2014. A responsible budget would lay out proposals for balancing the budget by then rather than aim for trillion-dollar deficits.

“But we will cut the deficit in half.” CBO analysts project that the deficit will be the same in 2019 as the administration estimates for 2010, a zero per cent cut.

“We inherited this mess.” The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan’s last year in office, the same as at the end of 2008, President George W. Bush’s last year in office. If one thinks policies from Reagan to Bush were mistakes does it make any sense to double down on those mistakes, as with the 80 per cent debt-to-GDP level projected when Mr Obama leaves office?

The time for such excuses is over. They paint a picture of a government that is not working, one that creates risks rather than reduces them. Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis. The problem is that policy is getting worse not better. Top government officials, including the heads of the US Treasury, the Fed, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission are calling for the creation of a powerful systemic risk regulator to reign in systemic risk in the private sector. But their government is now the most serious source of systemic risk.

The good news is that it is not too late. There is time to wake up, to make a mid-course correction, to get back on track. Many blame the rating agencies for not telling us about systemic risks in the private sector that lead to this crisis. Let us not ignore them when they try to tell us about the risks in the government sector that will lead to the next one.

The writer, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of ‘Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis’

Copyright The Financial Times Limited 2009

Look at the three graphs below in Figure 1. Each one compares relative returns for TIPS (TIP), S&P 500 (^GSPC) and gold (GLD ) the gold ETF that buys and sells physical gold. The time periods are year to date, the last 2 years, and last 5 years.

Figure 1: Relative Performance of TIP, ^GSPC and GLD

Comparison: Year to Date

These historical data are clear: gold has been the best investment of the three compared, with S&P500 and TIP changing places, depending on timing of entry, as the worst performer.

Of course, in the past 5 years none of these securities has actually operated during inflationary times, so this comparison is somewhat weak regarding inflation per se. The last five years have been essentially inflation-free, and possibly slightly deflationary in last six months. However, even during deflation, TIPS should perform well since their principal is guaranteed by US Treasury.

These results are probably more intriguing than decisive, since the world has had major paradigm shocks and gold is emotionally the winner for any type of systemic uncertainty or fear.

Oh–the answer to the question in the title of this post is: buy some gold and buy some TIPS!