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Sunday, February 24, 2008


Musings on the Stagflation Blues

Recent economic reports leave little doubt that we are in a period when we will experience a downturn in economic performance and an upturn in inflation simultaneously. This is an anomaly that Keynesian's have difficulty explaining, but is no problem for supply - siders, who believe fervently that inflation is strictly a monetary phenomenon unrelated to either employment or real economic growth. Since we have had an overly accommodative Fed, which has monetized huge federal deficits for extended periods since 2001 (due to Y2K, 9/11, disinflation, and the mortgage crisis), it is no surprise to supply - siders to see ballooning commodity prices in spite of a retracting economy. The one journalist/economist I find to be reliably accurate, Steve Forbes, predicts much higher long term interest rates soon, despite the Fed's efforts to keep short term rates low.

So that begs three questions: What should the Fed and the new administration do about all this, what will they do, and what should investors do?

Federal policy should be aimed at strengthening the dollar. The collapse of every empire's golden age has begun with the debasement of its currency. Instead of targeting a Federal Funds rate based on its reading of the economic tea leaves, the Fed should determine a target for the price of gold (a stable commodity) or as an alternative, a basket of commodities. With gold well over $900, the Fed could choose from several alternatives to accommodate political realities. It could select a lower target, realizing it has built inflation into the current scenario, such as $800 or more draconian, $600. Alternatively, it could select the current price, accepting as a sunk cost the inflation that implies, but drawing the line there. Any of these solutions will tip the economy into recession for sure, but that may already be in the cards. My choice would be to target $800 and allow for a target inflation allowance of 1-2% per year. So if we choose 1.5% as acceptable annual inflation, we would increase the target gold price for 2009 to $812, etc.

The Fed would modulate open market actions to keep gold's price near or at that target. This would provide our major economic players and investors with transparency, predictability and stability. It is a much better way than what we now have, with the Fed's successes and failures much more dependent on the skills and luck of the Chairmen and the Board. Best of all, the Fed could avoid its tendency to overshoot in either direction.

The Federal Government must get a hold on spending. For Mr. Obama to campaign on the ability to afford all of his programs if we get out of Iraq is turning policy priorities on their collective head. The Federal Government's first priority is national defense, and entitlements have taken up the rest of tax revenue and then some. It is past time we get rid of all the waste. Earmarks are an easy target, but all they actually do is reserve the allocation of funds already authorized. The problem is the size of the bureaucracy. Consider all the folks in all the Departments that are out of control of the administration, the swollen staffs of Congressmen that both cause and allow a flood of expensive legislation each year. This is why we have tremendous, intractable deficits at all levels of government. Simply put, we do not get our money's worth and increasing taxes won't change that equation. And, as has been written here previously, we have to get entitlements under control too.

Unfortunately, in an Obama or Clinton administration, the emphasis will be on increasing the cost of government, not reducing it. As for a McCain administration, it will certainly be more frugal, but we are likely to have a gridlock situation with a Democratic Congress, that will allow the current tax rates to expire and continue to pressure the administration with outrageous spending bills. The question is, could we expect President McCain to be tougher with Congress than Bush 43 has been? This was the worst part of GWB's performance.

So how does an investor play this? I think you have to assume that whatever happens to the Presidency, the GOP can not recapture Congress in 2008. So you have to assume the tax cuts expire in 2010. That means taking your capital gains in this year or next, stuffing dividend paying stocks in your IRA's instead of your taxable accounts, and selling bonds before interest rates start shooting up. Treasuries are not a bad place to hide out if you are in a high tax state, but really, equities are the only way to keep up with inflation in the long run. However, commodities, especially gold, should be good unless the Fed follows the above prescription, which I doubt it will. Cash will be a hopeless investment until the Fed and the Treasury seriously attend to dollar weakness. Not many good choices, I'm afraid.

Will the Islanders make the playoffs? They have come off their horrible slump with a pretty good hot streak, but really does anyone care? Hockey has big problems, as they assess more rule changes. Getting rid of the red line and reducing goaltender freedom behind the net did not help scoring as much as hockey's leaders hoped, so now they are looking at the size of goaltender equipment. This has some promise. The fact is, I haven't seen anyone score on a slapper from the blue line in about 20 years, and that is the real problem with hockey. Today, almost every goal results from a scramble in the crease, which means you don't really see it except on replay. This means that a game that was always more entertaining in person than on TV is now not entertaining anywhere.

In the glory days of the league, when it was a 6 team operation in the 60's, the sight of a Bobby Hull or Frank Mahovilich or Boom Boom Geoffrion or even Andy Bathgate skating the puck over the blue line and winding up for a slapper struck fear into the heart of an (often) unmasked goaltender, and thrilled the crowd. Today, it's a waste of time, since the average goaltender is much bigger, and with his equipment, covers the bulk of the net. He simply has to hold still and keep his balance and whatever else he does, don't open the 5 - hole. So instead, every team plays the same way - they dump the puck in, slowly, and chase, hoping that a forecheck will cause the puck to luckily come loose toward the crease where, if another player has created enough chaos, they can bat the puck in. Since every team plays the same way, the teams have no real personalities anymore - in effect the NHL has become...the NBA on ice.

In the old days, there were the Bruising Bruins, the Bad Guy Blackhawks and the Clutch and Grabbing Maple Leafs. Then you had the finesse teams, the flying Habs of Montreal with their three man rush, the non-checking but very skillful Rangers, and of course, the Red Wings led by the incomparable Gordie Howe. Hockey was not just great sport, it was a morality play like professional wrestling and like tournament poker is now. Today, very few of the sports fans I know can sit through a game on TV or ever go to the rink.

Personally, I would prefer watching Danny (Kid Poker) Negreanu take on Mike (The Mouth) Matasow, any day.

For OTBN, I opened a 1996 La Dieux Dunjon from Chateauneuf Du Pape. Fortunately, the cork came out perfectly intact and the wine was dry and delicious. I had it after dinner, since Barbara isn't really interested in OTBN and prefers white wine anyway. Nevertheless, the wine worked perfectly following a nice meal of barbecued ribs. As per the promoters' instructions, I left some for later this week and sure look forward to finishing it.

On 2/19, I bought 300 shares of Books a Million (BAMM) at 9.42. This stock has been a sensational trading vehicle for me. Despite the popularity of the internet, the demise of book publishing and selling has been grossly exaggerated. On 2/20, I bought 100 shares of Lowes (LOW) at 22.92, again for the IRA account. Hard to believe but this is now a value stock. People may not be buying so many houses, but that just means they will do more work in the ones they already own. When they do, LOW will again be in fat city. This company runs circles around its nearest competitor, Home Despot.

Monday, February 18, 2008


Open That Bottle Night

It's most unusual for me to do two posts in one day, but I meant to finish the first post with a reminder that the last Saturday in February is Open That Bottle Night (OTBN), a creation of WSJ Friday wine columnists Dorothy Gaiter and John Brecher. They are a married couple who write a wine column for those of us who love wine but aren't collectors and just drink it casually for sheer pleasure. Their point is that everyone has that bottle of wine that they never open because they are saving it for a special occasion that never comes. So it just sits there. Instead, they say, open that bottle on the last Saturday of February, enjoy it with spouse, lover or friends, and good food, and relive the special circumstances under which you acquired it.

The column they write with readers' stories about their OTBN bottle is always the best of the year, as the stories are invariably uplifting, and it's always fun to hear about what food was served and whether the wine was still good (some of these bottles are a little past their prime).

As for me, I've got a couple of good candidates, including one from our Monte Carlo trip in 1985. Time to empty that sucker!


Musings on Jolly Roger

My main thought on Roger Clemens and steroids is, it couldn't happen to a nicer guy. He was always a hump, always hitting and intimidating hitters, beaning Piazza, throwing a broken bat at him (without provocation) etc. Should he be in the Hall of Fame? The interesting thing is he had Hall credentials before he took his first steroid. The steroids simply extended his career. Same for Barry Bonds, by the way. This is in contrast to Mark McGuire who never had Hall credentials until he broke the home run record on steroids. So I would vote for Barry and Roger, but not Mark. Harder ones are Rafael Palmeiro (Hall career numbers, but who knows when he started on 'roids?), I-Rod and Sammy Sosa.

Steroids are a major problem in organized sports, because their use puts pressure on other competitors to take them to keep up, and their long term use is undoubtedly harmful. Athletes do all kinds of things to maximize performance, most of which are healthy and therefore encouraged. But when most experts believe Bonds turned to steroids to keep up with McGuire and Sosa, then you understand the importance of banning them from baseball. Bonds' conversion to a steroidal freak was so tragic because before he ever took one, he was already the best player in the game.

Baseball's failure to deal with this issue on its own will now have even more unfortunate consequences, since it appears that Bonds has possibly perjured himself in court and there is little doubt that Roger did last week before a Congressional Committee. This takes their transgressions beyond baseball's jurisdiction and into the criminal courts.

By the way, do these Congressional hearings constitute a reasonable use of our representatives' time and staff expense? Of course they love the publicity. But somone's priorities are screwed up if our lawmakers believe that they are really protecting the public in this case. What's next, an investigation of professional wrestling? As I said above, baseball should and could have handled this by itself, and might have if the Commissioner wasn't a team owner and a putzhead.

Of course, football is even worse, and a lost cause. Does anyone really believe it's natural for a league to be chock full of offensive linemen who weight 340 pounds and run the forty in 4.8? As the famous Nick Nolte line from North Dallas Forty went, better living through chemistry.


If there was ever an endorsement that meant nothing in an election, it has to be the one for McCain by President Bush. I'm trying to determine whether Bush 41's endorsement meant a little more.


Meanwhile we have Hillary promising to let the capital gains tax cut expire with the rest of the Bush cuts, presumably going back to the 20% rate (the result of a reduction) that she and Bill installed during their 1990's co-Presidency. Mr. Obama's prescription is somewhat more draconian, proposing a 28% rate. At that rate, my investment formula will change, since for me, when you include NY State's 7%tax (which extends to capital gains), it will cost 35% to take a profit and that's too much. That means less trading, a larger cash position, and selling from the IRA only, pretty much. When will the Dems get it through their heads that changes in tax rates cause changes in taxpayer behavior? I can guarantee my capital gains taxes will go down when rates go up, just as they have gone up as rates have come down. What will happen is that smart investors will start selling immediately after a Democratic victory in 2008, to book their gains while the rate is still 15%. They will save their losing positions for after the rates go up. This will mean that capital gains tax collections in 2009 will balloon (as people file 2008 taxes), continuing into the year the tax increase becomes effective, at which point they will immediately dry up.

This is the opposite effect from what we get when we cut income tax rates on a delayed basis, as people postpone income until the tax cut takes effect. So tax revenues slump at first, but balloon in the year after the cut is effective. This happened with both the Reagan and Bush tax cuts, and has happened every time we have had a capital gains cut.

Monday, February 11, 2008


Result vs Process

We virtually nailed it again on Super Tuesday, with the Dems a virtual standoff, but Obama inching ahead, and McCain knocking out Romney. Of course, Huckleberry is too full of himself to go away, believing he can get the second spot on the ticket by showing what a great campaigner he is. But he is not going to get it, and my early pick for the #2 spot (FL Governor Crist) is not going to get it either, since McCain will have to pick a more authentic conservative to appease the base. Though there is talk about the MN governor, and the SC governor, I think in the end, it might be Mitt Romney, who can satisfy the base without turning off independents. He will also bring a management/executive/economic expertise to the ticket, which is not McCain's strength. The other possibility would be to find a female governor somewhere in the party. Governor Crist will have to settle for a cabinet post.


One thing that has been illuminated in this year's campaign is the true difference between what passes for liberals and conservatives in the US (of course, by the classical definition, we are all liberals). Forget defining it by policy positions, or free market vs socialism, passivists versus militarists, etc. What is amazingly consistent is that liberals view everything according to whether the result is what they want, while conservatives treasure process. Though I contend you can view every policy difference through this prism, it really shows up in taxes and consitutional law philosophy. So liberals tend to favor the "living constitution" and its "penumbra," redistributionist tax and spending policies, government controlled health care solutions that cover everyone, etc. Conservatives want a supreme court that holds dear original intent, and relies on the explicit amendment process for any change, a tax system whose purpose is to raise revenue with a minimum of interference in business or people's private finances, and health care solutions that allow people to determine whether they need coverage or not, and puts the responsibility for paying for it with the people who want it.

For a liberal, a policy result is fair if it assures that benefits go to those who need them, and if the result looks reasonable to them. If not, change the rules, replay the game, recount the votes, etc. until the "fair" result is achieved. To conservatives, the result is fair if the established rules have been followed and the process has not been abused. Is torture for terroists OK? No, says a liberal, torture is never justified. Sure, says a conservative, the constitution says the country's safety is primary, and anyway, terrorists aren't a party to the Geneva Convention or US citizens and do not enjoy the protections either provides.

Once you see that, there is no sense arguing about policy because the sides are not on the same plane. The only thing sillier is having intra-party debates where the policy difference is over some sliver of a dispute about what's fairer, or what's the better process.

When a McCain slips up with his base, such as on immigration, you can guess how it happened. He went for what looked like a fair result for illegals, but his base believes that doesn't matter; once those immigrants ignored the process of getting here legally, the only acceptable response is deportation. Similarly, the MOVEON.org crowd won't give Hillary a pass for her war vote. Never mind that it made sense based on the information then at hand (or that it seems to be making increasing sense as the war goes better), they don't like the result (war). Conservatives won't give her a pass for anything, since, in their view, everything she has she got by lying and cheating.

That's why when I talk with my liberal friends, there are no longer any arguments. I simply say, "I realize you don't think the Bush policies have treated people fairly. My view, is that he put a better system in place for taxes, and revenue went up, collected from the people who made the money; that the war was needed to change the dynamics in the Middle East and remove one of history's butchers from power, though it may not have worked out as planned; and that the justices he put in place will interpret the constitution based on what it says. Those are the policy prescriptions we conservatives voted for. The next time you win an election, we'll have to do it your way for a while."

That day will come. More and more it looks like it might not be in 2008 though.


As the dems move ever closer to the brokered convention described in this blog since the beginning of the campaign, consider the noise you are hearing in light of the above. What do they do about Florida and Michigan? Is it fair that their delegates should be excluded. If not, what is the fair way to select them. A revote? A split based on the popular vote in the OTHER states? What if neither candidate has a majority? Is it fair for the super delegates to pick the candidate? What about the will of the primary voters? What should be the role of the Edwards delegates?

Note that none of these questions would even occur to republicans. Is it fair? Are you kidding? Those states knew the rules. We'll seat the super delegates, but that's it. The super delegates get to vote - that's in the rules. If their votes decide it - fine. The primary voters in the other states have no rights except to bind their elected delegates for the first ballot. The nominee is picked by the party and its delegates, not the voters. Easy, right?

Unfortunately, for him and for democrats' chances none of this fairness talk is working to Al Gore's advantage. There was a time when a candidate had the option of skipping the primaries entirely, and strategizing to pick up delegates through negotiation and direct appeal. Of course, that was when a minority of states had primaries. Now, that's apparently not a fair way to get nominated according to democrats and the media. Rudy Giuliani was taken over the coals for skipping a caucus and two primaries in relatively inconsequential states. Clearly, the elites have determined that the primaries now consitute the only legitimate path to the nomination. As a conservative, I don't think much of that process.


I made it through about 5 minutes of the Grammies last night, which is about as long as I've ever lasted. I have never understood why anyone wanted to watch or cared who won. For their part, The Counting Crows played a hastily arranged concert at the Bowery Ballroom in Manhattan last night, presumably to play some of the songs from the new album. I don't think the Grammies prevented a sell-out.


Last Wenesday, I bought another 100 shares of Bryn Mawr Bank (BMTC) at 20.96. Today, I bought 600 shares of Limco - Piedmont (LIMC), a new name recommended to me by my full service broker. When I buy through him, I double my purchase in dollars to alleviate the extra commission a little. The price was 7.35. Meanwhile, AIG wrote down another $5 billion today, and the total writedowns by financial service companies in this debacle is approaching $150 billion, on its way to $300 billion or even a trillion dollars, depending on who you talk to. Of course, dollars ain't what they used to be either.

Monday, February 04, 2008


Super Week

Yesterday was the Super Bowl (and super it was) and tomorrow is Super Tuesday. Following Florida, which the blog's source on the ground called perfectly, we head into a vote that is national in scope and should leave us with the setup for the conventions pretty much in place. Here's where I think we are in each party and where I expect we'll be after the votes are counted tomorrow night.

Democrats - Despite Hillary's Florida win, the media and the polls discern all the momentum on the Obama side, a truly amazing anomaly. Will the Democrats again find a way to snatch all but certain defeat from the jaws of probable victory? This party's ability to self-destruct in Presidential politics is utterly astonishing. The only better bet than the Giants and the "under" yesterday is that Obama, for all his rhetorical skills, will not be elected President in 2008. Ask any Democrat you know what Obama's positions are with respect to almost any position, and I bet they can't tell you. He has been a very well spoken sphinx up to this point, and when he does pronounce a position, it usually turns out to be hopelessly naive. He is all about bringing the two sides together (D's and R's, capitalists and terrorists, etc.), as if all these very basic policy differences will be resolved if we can only have an intelligent conversation.

So why are people going for him now? There are three sources of support for him. First, is the anti - Hillary vote, which is considerable among Dems, if not as virulent as among R's. Believe me, a lot of these Dems will go for McCain in the fall. Second are those truly on the left (the MoveOn and the KOS crowds) for whom Obama has been more consistent on their positions, especially the war, than Hillary. The third group is the young crowd, for whom Obama is the fresher voice and face, and the representative of change. Note the exit of Edwards hurts Clinton since his supporters were made up of members of the first two groups, and are shifting to Obama.

This presents a problem for Hillary since there have been few substantive positions for her to attack, and whenever she has gotten even a bit aggressive with him, either the race card or the old bugaboos that always dodge the Clintons come out. Of course it doesn't help when you have the kind of ethically challenged record the Clintons have compiled.

The problem for Dems is that they may nominate this guy, and after he is finally exposed for a while, they will realize they have a hopeless candidate. Sort of like the New Jersey Senate situation a couple of years ago when they were able to substitute Frank Lautenberg at the last minute. Too late this time, I think. Their best hope for this election now seems to be the scenario this blog has long said was a possibility - that neither candidate emerges with a working majority and the convention is actually deadlocked. I know political scientists say this is no longer a possibility - that neither party can wait til August to identify their candidate, but even if they decide the result before they get to the floor, it amounts to the same thing when the party leaders and at large delegates hand pick a candidate. And if they get the chance, they will pick Al Gore, and that is by far the most electable Democrat right now. In that case it will be Gore - Richardson, a very tough ticket. If Obama gets the nod, Gov. Rendell of PA will get the 2nd spot, and if somehow Hillary pulls through, she will pick either Obama or some white male well to the left of center, probably from west of the Mississippi. But if Hillary heads the ticket, she may have some trouble co-opting all the Obama supporters so she may try very hard to get him to run with her. This has become a bitter race.

On the Republican side, despite the remarkable staying power of Governor Romney, John McCain will close the deal tomorrow. If you look at his voting record, he is a consistent conservative, and the party's right wing will make its peace with him despite his high profile defections on campaign finance, immigration, and health insurance. Interestingly, all of those positions help him much more in the general election than they hurt him in the primaries. Hillary also framed her positions for the general election, but her party has been even less friendly to her than the R's have been to McCain.

The media questions the enthusiasm the base will have for Senator McCain, and whether they will come out. If the choice is between him and Obama, or Hillary, or even Gore, you can bet they will vote, and the voting machine does not register enthusiasm, it only counts votes. The folks like Rush who say they will sit it out are only letting the perfect be the enemy of the good, as the current cliche goes, and they will see that as soon as the nominating process is over. Of all the candidates left, only McCain has grown-up positions on the war, taxes, and immigration. I will vote for him tomorrow with more than a modicum of enthusiasm. It still will only count as one vote though.

The ticket will most likely be McCain and Governor Crist of Florida, also a very formidable ticket for the general election.


One of the other super things about this week was that the night before the Super Bowl, Counting Crows played a free concert in Arizona sponsored by the NFL. If you want to have some fun, go to countingcrows.com, click on the media tab and the audio tab and listen (for free) to the September, 2006 Houston concert, either in its entirety (my recommendation) or songs you select. The long awaited new album is out this week, too.

Also, I thought Tom Petty was super at halftime.


On 1/30, I bought 100 shares of Diebold (DBD) at 25.88. Today, I bought 100 shares of Fortune Brands (FO) at 68.85. Disclaimer time - Neither redwavemusings nor its author are investment advisors and the stocks mentioned here are not recommendations, nor are they likely to be suitable for readers (or even for me).

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