How Jobs are Created

Its Nice to be Squeezed Except if you’re Short

March 9, 2010: Today we celebrate the bottoming of the market crash of 2008-2009. With Dow Jones Industrials Average index up 60% from that low, the experienced observer of market price appreciation in a recession is becoming wary that the underlying forces working in our economy like: The Government Stimulus($780 Billion most of which is questionable and is yet unspent), Open Market Strategy(buy all the mortgges any generator offers pumping money into economy) by the Federal Reserve, potential consequences of Federal and State fiscal policies(Spend more than we have) leading to huge deficits as long as the eye can see, and a prospective mammoth government health care plan (a couple of $Trillion of new debt over ten years) being passed by Congress may put the brakes on the recent pace of GDP growth in our economy. Yet there continues to be active demand for stocks and bonds by institutional and private investors. Pundits talk about how the stocks in the Dow Jones Averages seem to be fairly priced given their recent earnings and PE multiples. Bond prices are inching up in a period when even the most ardent “bull” says that by 2011 interest rates should begin to rise reflecting the huge amounts of investor capital that is going to be required to finance and service Federal and State debt thereafter. Furthermore, this year we will probably see the end of benefits from the afore mentioned 2009 stimulus. Fed Chairman Bernanke says that the Federal Reserve Bank will stop purchasing mortgages by the end of this month and that suggests they will or should become a seller thus sopping up some of the excess liquidity out there now. Our biggest creditor, China, is making noises about diversifying their reserve investments away from the Dollar and today we heard their National Bank Director complaining about Obama-Bernanke politicizing our currency. So what is the problem?

The American securities market looks pretty robust but is it really? After previous recessions, like 1980-83 we started with inflation at 15-20%, interest rates in the teens and tax rates in the stratosphere. All it took to get the economy zooming was a principled President, lower taxes, consistent pressure against hyper-inflation and disciplined money policy by the Federal Reserve Chairman Volker. Then fueled by new and dynamic high technology, the economy generated 23 million jobs in the 1980-1990 decade. Hit with financial excesses in the junk bond markets and the residue of our ejecting of Saddam Hussein from Kuwait, the Hillary Health plan, and the passage of severe tax legislation, we had a minor recession in the early 1990s. But once again after the Clinton presidency turned right and the Republicans took control of the house, spending became subduedand tax revenues started to grow again. Then, after targeted business tax relief, firm control of the money supply, commercialization of the Internet, an explosion in consumer buying of real estate and other hi tech goodies, etc. the economy settle back into a solid growth pattern creating 14-15 million more jobs while producing higher tax revenue from lower rates. So what is different this time?

We start out with interest rates being artificially very low, The corporate, dividend, capital gain and income tax rates are the lowest since 1986 (except for the effect of Alternative Minimum tax), little or no inflation, and as a matter of fact, this period is more deflationary since the housing and commercial real estate sectors are still deleveraging.

This background looks like the toothpaste may already be out of the tube and the Bear opinion that we should have a retracement of at least a third of this rise in stock prices looks reasonable. Short term traders and hedge fund managers have accumulated large short positions in stocks and commodities in anticipation of that happening.

They are expecting a “Double Dip” decline reversing the rise from the lowsof 2007-2009. But the market refuses to go down so they can’t cover their short positions (Having sold securities and borrowed them to deliver to buyer and later expecting to repurchase the borrowed security at lower price). There is nothing more uncomfortable than being short in a rising market. More big money investors are riding the systematic periodic investment strategy by those planning for retirement and the huge amount of liquidity provides the ammunition to do dirt to the short positions. This can squeeze the courage out of the short seller to stay fundamentally correct but practically wrong in their position. So what will happen?

Other than a major event occurring, we could see the short seller capitulate and cover their positions causing a brief but sharp rise in the market. It would be an opportunity to adjust one’s investment strategy to hold positions consistent with a more subdued long term GDP growth rate expectation.

One Man’s Opinion – Bud Brewer

MARKET ECONOMICS VERSUS GOVERNMENT CONTROLS

This short attempt at humor infuriated those who think Tiger Woods’ “Mea Culpa” press conference last week closed the issue and future references to an action he or his wife actually or allegedly took that night in November should be off limits. Meet the Press Host, David Gregory; asked him “Do you expect people to take you seriously after making such a remark?” Adding “it was a comment thought by many to be in bad taste.” Other bloggers and certainly all those who are opposed to the Governor’s being a candidate for President in the 2012 election apparently agreed with him. The governor said that he thought the ” American people still enjoy a sense of humor” I thought the reference to a nine iron smashing the window of big and out of control government remark was pretty much on the mark. I also find it strange that these same critics had no comment regarding a Fox TV channel show that featured a cartoon character with “Downs Syndrome” commenting that “her mother was the former Governor of Alaska”. Personally I think both comments were perhaps insensitive but they did convey a humorous element and didn’t seem to be so outrageous as to cause such an uproar given the history of political verbiage.

Unfortunately, what was lost in the Meet The Press interview on Sunday February 21st was the solid logic of Gov. Pawlenty’s description of why the exploding budget deficits and unbridled increases in actual or proposed government spending are not sustainable. He said “its simple math.” Here he was on target yet there was no follow up by Gregory except to ask “Do you think the Stimulus program worked?” Pawlenty replied “based upon the goals of the Administration, I’d say no.” Gregory asked, “What about the 12,000 jobs created in your state?” Pawlenty said “Those were government jobs and you do not grow the economy by increasing the number of jobs paid for by collecting more taxes.” Actually there may be some multiplier benefit but whatever that amount would be will unlikely create any real or even nominal growth in the economy.

It is sad to see that when a person expresses a different perspective on what the role of government should be in America and how it may vary from how government programs currently operate, that the debate slides into questioning that simply seeks to confirm the status quo or to grant more entitlements to constituents and to give more authority to government to administer greater control over the economy. Pawlenty was the only one at the Governor’s Conference I heard say, “we are trying to solve a problem that exists because of a series of negotiations that took place between managements and labor over the period of the last forty or fifty years without a basis for sustaining them even in a growing economy.” Unrealistic entitlements are the problem and until the American people are ready to accept the reality that we must bring them in line with the economic ability to pay for them by constructive tax laws, contractual amendment, or God forbid, State bankruptcy, we face the potential for monetary and economic disaster of immeasurable proportion.

During the Governors Conference this week, the subject of health care was also discussed with far ranging views and opinions. One thing that demonstrated the differences in attitude was the Democrat Governors saying over and over: “these are our problems: 1. Insurance rates are rising by amounts that preclude individuals from being able to afford their premiums, 2. Insurance companies’ earnings have been exploding on the upside in part because of ill founded increases in rates. 3. Insurance companies are excluding those with pre-existing conditions. 4. Those that lose their job are also losing their health insurance. 5. We have to provide affordable premiums for those 20 plus million who have no coverage at all.
The only solution is to adopt a single payer system like Medicare or raise taxes on the wealthy to pay for it.

If you accept these as the minimum conditions for obtaining a health care bill, there will be no bill this year. Pawlenty uttered the following truism: “Healthcare reform is a great issue for this country. The system we now have is broken and we have to fix it. There is a way to do it but we must have consumers and markets in charge.” Now what does “markets and consumers in charge” mean? Consumers must have enough “skin” in the game to make it worth while to refuse superfluous medical procedures if they are going to have to pay for them while that medical service is not providing cure or improvement results for his illness. Today 20% or more of the cost of medical procedures allegedly initiated on behalf of the consumer are actually for the benefit of the provider, not the patient. We must incentivize the consumer to determine whether there is enough (or any), benefit to him to make him want to have that specific procedure. And that will be determined if it results in better health. To achieve this goal, and yet continue to protect the consumer from malpractice and still prevent the medical provider from having to order unnecessary procedures really only designed to protect them from lecherous law suits, we must have tort reform.

I was impressed by the strategies and proposals made be governor Pawlenty. He may become a valid conservative candidate for the Presidency in 2012.

One Man’s Opinion- Bud Brewer

Interesting Comments From The Left

This is a video from a women who simply does not get it!

It May be DeJa Vu All Over Again

February 11, 2010: Elizabeth Warren (1), the Chairwoman appointed by Harry Reid in the fall of 2008 to lead the Congressional Oversight Panel formed to oversee the Seven Hundred Billion Dollar ($700,000,000,000) Toxic Asset Relief Program (TARP), has been an advocate and champion for the “middle class working family” for the past ten years or so. Early this decade, she completed a study of how a family composed of a married couple and two children have actually become poorer during the period from 1970 to 2003. She has predicted the bankruptcy of the Middle Class family unless the problem of the “rich getting richer” and the middle and underclass becoming poorer is solved. This is called “redistribution of wealth” folks.

Looking strictly at the data she offers and the absolute changes therein, adjusted for inflation, it is difficult to dispute her conclusion. But, when you look at the real value of the progression of this so called middle class family’s struggle during this same period, there has been a ratcheting up of the quality of life. They enjoy the availability of everyday higher and higher advancements in technology that has given them automobiles and unparalled efficiencies in transportation, advances in media-entertainment communication, medical and pharmaceutical discoveries, better trained providers of health care services, improved opportunities for education, and of course the ability to see the whole world at your desktop computer through the Internet, etc., I believe her conclusion may be flawed. Nevertheless, I think we will be hearing a lot from Ms. Warren about how financial institutions requested by the consumer to fund these goodies are exploiting the middle class, notwithstanding their voluntary leveraging into more expensive housing. transportation and the questionable pursuit of life styles of the rich and famous.

In her new role as Chairman of the COP Committee, she is holding monthly hearings on the results of TARP and has begun to focus on the condition of the Commercial Real Estate Market and the potential threat that a new wave of foreclosures may be upon us beginning later this year unless someone (the Government) does something about it. This is almost certainly going to be the recommendation of her committee.

Here are some of the facts: According to Jon Greenlee, Associate Director of the Division of Bank Supervision and Regulation of the Board of Governors of the Federal Reserve System, Federal Reserve examiners are reporting sharp deterioration in the credit performance of loans in bank portfolios and loans in Commercial Mortgage Backed Securities (CMBS). Of the approximately $3.5 trillion of outstanding debt associated with Commercial Real Estate, including loans for multifamily housing developments, about $1.7 trillion was held on the books of banks and thrifts and an additional $900 billion represented collateral for commercial mortgage-backed securities, with other investors holding the remaining balance of $900 billion. More than $500 billion will mature each year over the next few years. In addition to losses caused by declining property cash flows (rents and lease income, etc.) and deteriorating condition for construction loans, losses will also be boosted by the depreciating collateral value underlying those maturing loans. These losses will continue to put pressure on bank’s earnings especially those of smaller regional and community banks that have a high concentration of them.

Before the 2007-2009 financial industry meltdown, securitization markets were an important conduit of credit to the household and business sectors. This market essentially shut down in mid 2008 causing the Treasury and Federal Reserve to create a program called “Term Asset-Backed Securities Loan Facility” (TALF). Entities in the financial industy were having to mark their assets to market under financial company operating regulations. Whether the loan was current or not the high leverage common in financial companies was causing capital to shrink if not disappear even among what were considered the more stable and successful banks or other financial institutions. TALF was an idea that if you could shift the so called “toxic ” assets requiring Mark to Market from the regulated financial institution to the portfolio holdings of large institutional or individual investors willing to take the risk inherent in the loans, this would go a long way toward stopping the technical implosion of the financial and banking system. The Treasury saw this as a plan by which they could guarantee or indemnify the TALF eligible investors from major loss by providing the financing for the purchase along with certain buy back guarantees for a percentage of the face value of the loan and the banks woul then be able to fund new auto loans, student loans, credit card borrowing, small business loans and even loans to larger businesses thus stimulate economic activity. If a loan purchased by the investor was not paid off or was sold below a certan minimum percent discount of face value thereafter, the investor would receive a high percentage of their loss paid to them by the Treasury. If the loan was paid, their wold enjoy a very high return. While the government guarantees in the TALF program did stimulate buying in TALF eligible securities holding these CMBS, the banks have been reluctant to loan the monies they received until they have a better understanding of what future risks are going to be. Now, market participants anticipate that CMBS delinquency rates will climb higher in the near term, driven not only by negative fundamentals, but by borrowers’ having difficulty rolling over those loans that are maturing.

What does all this mean? If we can believe Ms. Warren, the pending rising defaults in commercial real estate loans are going to cause another earthquake in the financial markets. The question then becomes, “will the Federal government step in with new guarantees or the funding of massive new programs designed to provide liquidity or simply will they fund a bailout of the 3000 plus small banks and the TALF investors that are holding these securities on their balance sheets”. Will the “too big to fail” concept be extended to the small and community bank? If it’s true that over 50% of the Commercial Real Estate loans are under water, I suspect that we will soon begin to hear about a new trillion dollar program that must be instigated before the November elections to save the financial system again. Perhaps it will even be a recommendation by Ms Warren who seems to have little confidence in capital market economics or just believes they are too punitive to those who are willing to take risks if they make a profit but cry for help when they fail.

Here is my take. If the Government thinks it is manageable to create another Trillion or so of Treasury debt to keep the small and midsized banks from failure and make good on their guarantees caused by the continued necessity to mark to market their assets to levels that cause their equity capital to fall below that required to be sustained by regulations, why wouldn’t it be in the American taxpayer’s best interest to just have the bank regulators go ahead and let the banks fail, go through bankruptcy, sell their remaining assets to new investors and reorganize with capital loans totally or partially guaranteed by the same partnership (Federal Reserve Bank and U.S. Treasury)? Given that these banks are going to fail because of poor due diligence and poor risk management, why should we be concerned that their current shareholders or owners have to suffer the consequences caused by their misjudgments?

One Man’s Opinion—Bud Brewer

(1) Elizabeth Warren (born 1949) is an American attorney and law professor. She is the Leo Gottlieb Professor of Law at Harvard Law School — where she teaches contract law, bankruptcy, and commercial law — and has devoted much of the past three decades to studying the economics of middle class families. In the wake of the 2008-9 financial crisis, she became the chair of the Congressional Oversight Panel created to investigate the U.S. banking bailout (formally known as the Troubled Assets Relief Program). In that role, she has provided a critical check on the U.S. Department of the Treasury and has been a leading advocate for accountability and transparency. In 2007, she also first developed the idea to create a new Consumer Financial Protection Agency, which President Barack Obama has advocated and Congress is now considering.[

Obama: “You Mean there’s No such Thing as a Free Lunch?”

Brad Schiller is an effective professor of economics at the University of Reno, Nevada’s College of Business. I say this because like most people, during my 50 years in the financial services business world, I have lost much respect for many teachers in our Universities twisting the minds of students about how the world really works. But Brad Schiller is an exception to that belief and in a column, written in of all places, the Reno Gazette Journal, Reno’s daily voice from the left. Professor Schiller hit the legendary nail on the head with his explanation of why Mr. Obama’s claim that his Bill to provide National Healthcare for everyone at zero increase in cost is and always was flawed. Take a moment to paste this to your URL line in your Browser and read it. http://www.rgj.com/apps/pbcs.dll/article?AID=20102030407

It seems clear to me that the rising disappointment in President Obama’s leadership is being caused in large part by the slow but steady realization by his most ardent supporters that this brilliant orator has little understanding of how a free market capitalistic based economy operates, let alone what the Government’s role should be relative to the nurturing of its growth. Let’s take his latest comments that he is going to increase employment by giving a $5000 tax credit to small businesses that hire another employee. Incentives are an important ingredient in the decision making process exercised by a business manager. But a one shot credit or even a one shot cash payment mean little to whether or not the hiring of that person will add to the success of that small business. The factors considered by managers to determine if hiring another salesperson, receptionist, service agent or where house employee, etc., are more likely to be based on whether or not his hiring will add value to the firm’s ability to increase revenues and improve profits. On the other hand, if the local or Federal Governments decide to eliminate a restrictive and costly regulation affecting his business or to reduce or eliminate annual fees or taxes on the business revenue, the manager may decide to invest the increase in resulting profit margin (cash flow) by adding personnel to open a new branch, or add new products or services for which there is a growing market. But a one shot tax credit of $5000 to employ one of the unemployed is not a real job creator.

If President Obama thinks his plans for increasing taxes on small businesses earning over $250,000 per annum (a figure that includes individuals organized as an S corporation, LLC, etc., the profits of which are taxable to the shareholder as ordinary income) will result in rising employment and economic growth, he needs a refresher course at the Harvard Business School (or maybe it should be somewhere else). President Bush’s “Tax Reduction for the Rich” legislation of 2002 did much to get the business community, big and small companies, to commit capital to exploit opportunities perceived to be available. The fact that both he and the Republican Congress from 2002 to 2006, urged on by the Democrat minority did little to reduce discretionary and entitlement spending in order to pay for the war in Iraq and neither the Federal Reserve, Security Exchange Commission, members of Congress nor the large underwriters on Wall Street recognized the risks developing in the Sub Prime Mortgage disaster, is not a basis for concluding that the 2002 “Tax Act” in and of itself was unfair or prevented the funding of in place entitlements for the poor and disadvantaged. In fact the Federal Personal Income Tax revenues increased from $1.8 Trillion to $2.25 Trillion, an increase of $400 Billion in the first two years following the across the board tax rate reduction and continued to increase at that rate until 2007.

Today’s economy, having been buffeted by the near financial meltdown and the Government’s action to keep large (Too Big to Fail) banks afloat with almost $800 Billion dollars to shore up their balance sheets, is suffering from a “deer in the headlight syndrome” of its small business sector. Big companies are generating cash by reducing inventory and aggressive cost cutting but the engine of the U.S. economy is the small, creative and dynamic businesses where the large majority of new jobs are created. Those managers that I speak with are reluctant to employ their remaining capital and their business plans project questionable profit potential given the uncertainty of Federal and local tax policy changes being considered.

In order for this economy and its interrelated parts of the global market to get back on tract, President Obama and the Democrats are going to have to give up on their plans to enact legislation designed to redistribute the wealth of this country’s most successful investors, entrepreneurs and businessmen. Fair taxation, yes but redistribution, no. He must give reasons for the consumer to once again develop a sense that the strength of our business community and a new found fiscal wisdom by our government will enable them to regain enough confidence in that government to begin investing again.

One Man’s Opinion – Bud Brewer

The Arrogance of Power

January 19, 2010: It seems when a politician is elected to office these days something takes over their common sense, if they ever had any. The attitude of President Obama and our Congressional Representatives and Senators that they deserve to be treated special just for being in office is patently absurd. Proper security, yes, but they are typically driven around in limousines, have special food services, enjoy a special form of health care, have large and excessive office staffs, many of which are there soley to work on their re-election. Watching or reading media coverage, one sees them being fawned over by the Washington Press corp. In the Obama Administration, it is even worse. Members of his Administration and the Congress charter Boeing 747s at government expense to fly to overseas junkets in first class style often with all members of their family. In some cases, they even command U.S. military planes to take them home for the weekend, all paid for by federal tax dollars

During Congressional hearings, they sit on a dais elevated two or three feet above any witness that is testifying voluntarily and typically show little if any respect for the individual or panel of witnesses. I’m not talking about when a Committee is investigating an actual or potential defendant in a criminal act, I’m talking about those meetings where a witness is educating the Congress and appearing voluntarily. No, there is something that happens to those that enter government service or run for and are first elected to office. The success in their campaigns seems to cause them to become even more narcissistic than they otherwise might be.

There is a quote from Lord John Emerick Acton (1834-1902) saying, “Power tends to corrupt and absolute power corrupts absolutely.” Well, Barack Obama and his fellow Democrats took office with absolute power one year ago and as we look back, not just at the lack of his governing through a two party system, but more at the effectiveness or lack thereof by his 60 seat Senate majority to get important legislation passed, it has become clear that he seeks to have legislation done behind closed doors with little or no debate or the transparency he campaigned on. This combined with attemps to posture the United States as a conciliatory power that has made terrible offensive mistakes and now wants to be more accomodating to countries like Iran, Yeman, North Korea, and other nations dominated by dusruptive forms of Islamic or totalitarian governments. His unsuccessful efforts to influence our foreign allies to join with America in the pursuit of stronger anti terrorist policies can explain why voter confidence in his ability to govern is cascading down from the high level present at his inaugural.

During my lifetime, perhaps with the exception of the Roosevelt era, every successful president has governed from the center of the political spectrum. It is true that this was usually required to get bi-partisan support for any proposed legislation simply because they could not get it passed without them. But in most cases there was genuine regard for the leaders of the other Party and many of its members. I can remember how Ronald Reagan and Tip O’Neil, the Speaker of the House at the time of Reagan’s election, would be able to have discussions on serious matters, laugh at each other’s jokes and slowly but surely gain respect or at least a modicum of appreciation for the other’s point of view.

In the current period, Americans are increasingly becoming polarized. Is that part of a plan or a consequence of Obama’s leadership? If a plan, we better watch out because the next step is a potential non reversal of government authority over our everyday life and a diminishment of freedom, liberty and our standard of living.

After listening to the Barney Frank crowd express their ideas for regulating the financial industry into a state of atrophy and steadily losing hope that our free enterprise system will endure, I was heartened as I watched and listened to Frank Blankfein (Goldman Sachs CEO) and Phil Angelides (former California State Treasurer and Chairman of the “Financial Crisis Inquiry Commission Committee”) exchange views on what roll Wall Street played in the near Collapse of the Global financial system in 2007-2008. The reason I was heartened was that there in front of the World, Blankfein laid out a clear explanation, with all its strengths and weaknesses, of what capitalism is, how it works and why it is so effective in fueling economic activity for the betterment of American society. He went through just how investment banking, capital markets, brokerage and financial asset trading works and how it fuels capitalism. He described the role of the investment banker serving one client’s need for raising capital and then serve the needs of another through other divisions of its own structure to distribute it. Usually the investment banker is joined by others to provide the means of distribution of that financial product, (i.e. stock, bonds, or other securities) to or through investment brokers or advisors responsible for managing the investments of institutions and individuals. He explained that in this process, the investment bank, acting alone or heading a group of other underwriters, assumes extreme risk related to the process of underwriting and distribution of financial products. During this time, its equity capital becomes increasingly leveraged as its ratio of equity to its liabilities could and does require effective risk management to protect its shareholder interests. He said the demand for financial instruments to fund the need for mortgage capital necessary to enable individuals to purchase homes did cause his firm and most firms to build liabilities to a risk related level of 40-50 or even higher multiples of its equity. Recognizing that increasingly those applying for loans to buy homes were not going to be able to service the debt called for (so called sub prime mortgages) the firm accelerated its effort to address its exposure to risk. But at the time there was a common belief that the underlying collateral (real estate properties)for these securities and their derivatives would continue to rise or at least hold its value. Nevertheless, since the inherent loss potential with such risk can and did threaten the equity value of Goldman Sach’s shareholders interests, they took appropriate steps to hedge those risks. Some of those steps involved the use of derivatives that effectively made the company’s position be a seller of comparable securities to those it was underwriting. It was at this moment that Phil Angelhides made his remark “It sounds to me a little bit like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars.” In fact that isn’t far off the mark but it is no different than what any person, corporation, law firm or whoever would and should do when, attempting to manage potential liability risk exposure. They prudently transferred risk to counterparties.

Unfortunately, his comment was picked up by the media and headlined “Investigating panel rips Wall Street”. The question and the response is clear evidence that our current Administration along with most liberals in Congress and of course the fawning media does not understand or appreciate the process of free market capitalism and in fact assures that until a change occurs, we are doomed to the consequences of that ignorance,

One Man’s Opinion –Bud Brewer

WHY IS THE GAME OF BRIDGE SO MUCH FUN

The New Economic Superpowers

December 24, 2009: I know the Obamacare battle has probably been talked to death in most crowds but this past week’s legislative process is probably the worst exhibit of what has befallen the American People as any in modern times.  When he was campaigning, Obama said he was going to open up the debate for legislation by having full disclosure on C-span and the Internet so everyone could see and listen to different points of view.  But now that he has taken office, his strategy for open government has been trashed.  Yet we still have the partisan majority creating law in ways some call horse trading while others call it bribery.  In either case it smells and makes me want to go back to just not knowing how bad and less than honest these people really are.  I must add that the record of the Republicans in recent years was not much better.  Such a disgusting exercise as that we have just seen by the United States Congress makes people of integrity wonder whether this country can endure. If this isn’t enough, when you look at the world through economic bifocals, I am amazed how much our country has slipped in terms of its place of influence in the World.

China, India and Brazil are becoming such dynamic economies in the global markets that it will be a mistake by money managers to give only token consideration for investing more in them. While many of us have been enthusiastic about opportunities in these countries, investing more than a relatively small amount of capital carried perceived risks that could have seriously damaged a portfolio if they became manifest. The situation is changing now though and I think many more investors or their managers will ratchet up the percentages of their capital that they invest in these dynamic economies.  To be a major investor in China, India and Brazil, the investor must have a significant understanding of the strengths and weaknesses of these countries.  That means some professional advice or counsel by people who are associated with entities that have serious presence in those countries and a meaningful understanding of their politics and socio-economic conditions.  Don’t be fooled by the images we see in western media of masses of people struggling to survive in these highly populated countries.  While it is true that only 25-30% of the populations are well educated or enjoy comparable purchasing power adjusted life styles, these minorities are growing rapidly and in absolute terms represent more people than the United States, Japan and Europe combined. It is likely that within the next fifteen years, China will far surpass Japan’s gross domestic product and will begin to threaten the United States as the World’s largest economy.  By 2025, China’s Gross Domestic Product should be approximately $12-15 Trillion (currently $4.5 Trillion).  If the U.S. is lucky, its GDP could grow to $14-15 Trillion by that same time.  The difference will be in the make up of that output.  Faced with mammoth debt, confiscatory tax policies, some Federal Reserve manipulation of interest rates creating cross curents for deflation or potential price inflation, higher than normal unemployment and rising government mandates upon individual spending, the American consumer is not likely to be buying too much over their level of purchases in 2009 for some time.  The Governments of most states will have faced enormous fiscal problems and many will have experienced some form of default.

While a majority of Americans will struggle through this period and be able to maintain most if not all of their present life style, many, due to their extended debt, little or no reserve savings, etc., will not be able to sustain theirs and will fall into that group supported by the our government welfare and unemployment benefit programs.  Many traditiional American businesses will be turning to the government to help with their deteriorating financial situations. Some government help will be provided allegedly to save jobs in either what they call a bailout or by corporate reorganizations in which creditors and the government become owners of the enterprise.

Many in the finance industry (Wall Street) already entrenched in the Global markets administering their own capital or that of individuals, institutions and sovereign funds, etc., will begin accelerating the process of making a major adjustment to their strategy to become less dependent upon U.S. investment and more committed to the markets created by and serving the 2.5 Trillion people in China, India and Brazil.  Their economies are growing at 8-10% per annum, they have huge trade surpluses, little or no consumer debt and more savings than they know what to do with. This means that their relatively more conservative consumer demand for many products and services, that we have always thought indigenous to the Western consumer life style, will be developing in these countries. While the United States will be mired in debt and struggling to produce enough GDP to service the interest and principal payments on it along with the requirement to pay for the explosion in entitlements, China, India, and Brazil citizens will shift some of their trade surplus and savings to increasing their standards of living. For example, did you know that this last year, the Chinese purchased more automobiles made in China than Americans did here in the U.S.A.?  Did you ever believe that would happen in our lifetime?  During this past year when the U.S. economy contracted 2.5% and Japan’s shrank 5.2%, China’s economy grew 8%, India’s 6% and Brazil ended up even or slightly in the black.  China has emerged as the economic engine driving the global economy.  Its economy is set to grow another 9-10% in 2010.  In October, their industrial production rose 16%, fixed investment 33%, car sales 77% and consumer spending 16%.  China has a small fiscal deficit and a large trade surplus.  It has $2.3 Trillion of foreign reserves, a number that has grown $60 Billion per month during the 2008-09 crises.  These reserves have given China the flexibility to stimulate its domestic economy without incurring mammoth debt like our Democrat friends in Washington.

The stories are much the same in India and Brazil.  All the while Japan and the United States are competing to become the world’s largest debtor nation.  Total U.S. Debt to Gross Domestic Product has risen to 358%, on a par with Japan’s bloated levels.  This 350% level for both the U.S. and Japan is far above the 100% level for China, India and Brazil on average.  The federal and state government’s fiscal positions are in a crisis.  The federal deficit in the U.S. this year will be 11-12%, the worst since World War II.  The Federal debt has expanded from $2 Trillion in 2000 to $12 Trillion this year. The American consumer debt has risen to 100% of GDP and the saving rate is still barely zero.  Only the corporate sector of the U.S. economy is healthy, with high levels of cash and low leverage.  A recent study done by Goldman Sachs predicts that China will eclipse the United States as the world’s biggest economy sometime in the 2020-2030 timeframe.

What does all of this mean relative to what we do with our investment capital?  To me and I believe to many serious investors around the world,  it means that we ignore these trends at our peril.  We must reallocate more of our investment capital to  the faster growing economies outlined above.  We should maintain more modest investment in domestic companies and then only in those that have global presence and distibutive strength.  Our investment in service companies should be conditioned upon their ability to exploit the opportunities from the expanding economies of  China India and Brazil.   My working number for investors with time horizons of 10-15 years is  50-75% of the equity segment and perhaps the same ratio of fixed investment.  The next few years of such a strong shift will likely be volatile as transaction demand and supply temporarily distort fair market value but by 2020 such a shift in weighting should be and have been experiencing stable superior growth.

There likely will follow a shift in the political power and economic influence of the United States and that change will be a weakening one leading to negative forces upon stock and bond valuations.  Don’t misjudge the pace of these changes.  The U.S. economy will not fall off a cliff and the expanding role of government will mask the longer term consequences and rate of change in relative prices of business assets vis a vis the rest of the world, but the change will be real.  Today there is little or no premium one has to pay to play so to speak.  Tomorrow there will be!  The WesternWorld will continue to be an important even if diminishing  segment of  Global economic activity, but we will be experiencing a rising pace in the rate of decline of our relative economic and political influence in the world.

One Man’s Opinion– Bud Brewer

I Guess I am a Racist

There are some people whom I admire a lot. Upon reflection as to why I feel this way, I find that they all seem to have some characteristics in common. Raised in Christian family bludgeoned daily about doing the right thing according to standards that make more sense to me today perhaps than they did when I was a kid, I find camaraderie with people who have the same values. If someone says that they believe that each individual has certain rights and those rights are in line with my beliefs, I tend to feel good about them and want to help them in almost any endeavor they try. When an individual expresses opinions and views that I agree with when speaking to local, national or international controversy, I feel good about them and want to help them in any way they are in want. When a group of people or an organization of any kind appears to represent my beliefs and expresses them in words that I tend to use to express my own feelings, I feel comfortable becoming a participant in and supporter of their mission. I don’t question their ethnicity, religion, schooling, number of marriages they have, or where they came from. I tend to just feel comfortable with what they say or do.

Now when I examine some of my feelings about those with whom I have differences I find myself concluding that the problem is that they have a different, at least in my opinion, perhaps less ethical standard by which they are living. When I examine who is embracing those different standards, principals or ethics, I must admit I see religious or racial groups not individuals. As a result I can be having a conversation with a black person whom I admire and find myself making derogatory or generalistic remarks about black people. I do believe that a very large majority of black people just think and behave differently than I do or those with whom I organize do. I am guilty of group discrimination if the majority of the members of that group have different values than I do.  Therefore when I hear the words Black Caucus or African American or National Association for the Advancement of Colored People, I generate an attitude that is far different than when I have lunch with a friend who is black or when I sit in admiration of the work ethics and success of a Tiger Woods.    I cringe when a low rider car passes on the road with speakers blasting rap music, yet have a lifetime love of some of the songs sung by Nat King Cole or Sammy Davis Junior, Ella Fitgerald and their likes.

No matter what a Society mandates for its people, there are bound to be individual differences among  its members.  Some of those differences are repugnant to me.  Others are almost invisibly pleasant.  But when people are judged intolerant because of their reaction to behavior that is inconsistent with the standards embraced by the whole, they are often thought to be racists.  This is as if experiencing a feeling or displeasure with an act or trait of another is something unnatural.

If I voice objection to the political philosophy of Barack Obama or the illiterate rantings of a Maxine Waters, I am called a racist.  If I comment on the way Jesse Jackson or Al Sharpton exploit their religion based tax exempt schemes to control black constituencies, I am called a racist.  If I am offended by the way black musicians use vulgar words in their performances and can’t seem to be able to speak a complete sentence without including ten superfluous words such as “like’, “you know”, etc. , I am called a racist.

Well folks, if having individual or distinctive views or reactions to that which is occurring around us or promulgated by an ethnic group is racism, then……….

One Man’s Opinion – Bud Brewer