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Ye 2008 8 Page Print Final


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Ye 2008 8 Page Print Final

  1. 1. Helping You Navigate an Uncertain Investment World Year End 2008 Viewpoint Volume 9 Issue 4 Market Summary 2008 Annual Returns 2008 SINCE 2000 D&C EIP - 23.7 7.5 EQUITIES “ONLY”* D&C EIP -17.9 9.4 TOTAL RETURN* S&P 500 - 38.5 - 2.9 DOW JONES - 33.8 - 2.6 Looking for Economic Salvation from the Devil? NASDAQ - 40.5 - 5.5 LEAMAN BOND 4.86 5.5 D&C Equity Income Portfolio returns net of fees. See Trying to Solve the Problem of Too Much Government with More Government performance disclosure on page 8. T Inside this issue: HIS IS THE ISSUE OF VIEWPOINT EACH YEAR You’ll also glean from reading this quarter’s VIEW- where we attempt to encapsulate an entire year’s POINT, we’re dismayed at the lack of challenge to the in worth of notable events, highlights, lowlights, coming administration’s economic plans. As Harvard Looking for Salvation 1 unfortunate incidences, boneheaded moves, defining economist Robert Barro pointed out in the Wall Street moments, record achievements, feats of daring do, acts of Journal recently, the “stimulus” claim is based on some- The Front Seat 2 cowardice, wild successes and utter failures, frauds, scan- thing called the Keynesian “multiplier,” which is that dals and other political milestones. each $1 of government spending yields 1.5 times that in Blame it on Reagan 3 As if that’s not enough of a literary challenge, we’ve economic output. There’s no evidence to support this got to summarize a multitude of events with humor, theory. It assumes government can create wealth out of So much for Change 4 thoughtful insights and witty repartee while putting it all thin air. If that’s true, why doesn’t the government spend Saving the Auto Makers 5 into historical context and minimizing the grammatical $10 trillion (or $100 trillion) and make us all rich beyond and spelling errors. (Thank heaven’s for spell chex.) our wildest dreams. Why a measly $850 billion? The Keynesian Fallacy 6 So, after much consideration, research, contempla- We’d like to know where are the defenders of the tion and years of learned observation we can offer the free market? Where are the alternatives to public works What do we Do? 7 following summation of the year of 2008: “lots of stuff spending that’s only going to grow big government big- happened, and most of it wasn’t good.” ger? Why are we propping up a dead industry like autos Change it don’t come Easy 8 Hey, what’d you want for free? Seriously though, without so much as a debate as to the economic merits of 2008 was crammed full of so much stuff we almost blew doing so? As we note on page 5, the auto industry has Special EIP Annual Update a brain cell trying to boil it down to a measly 12 pages of spent over $500 billion in the last ten years trying to “fix” this annual expanded addition of VIEWPOINT. And then their competitive problems and we’re suppose to believe we just gave up. What follows is not so much a recap of that another $38 billion (or even another $500 billion for that Deschaine & Company, L.L.C. the events of 2008, (who wants to relive most of it anyway) but matter) will make them right? All in the name of saving a A REGISTERED INVESTMENT ADVISOR rather some commentary on what the potential impact of few over-priced jobs. Over that same period, U.S auto the events may have on our lives, particularly the part we industry employment dropped from 1.3 million to just World Headquarters know something about—the over one million. If we do the 128 South Fairway Drive economy and the stock market. math, the $500 billion spent by Note to Viewpoint Readers Belleville, Illinois 62223 Let us state right up front the auto companies works out so there’s no misunderstand- Worried about the economy and the financial to about $167,000 per auto job Phone: (618) 397-1002 ing, we’re strongly opposed to markets and not sure what to do next? See our lost—per year.(1) Fax: (618) 397-4102 the big government solutions Year End 2008 Strategy Update for some specific The economic E-mail: to our economic plight being suggestions for your consideration. “stimulus” being kicked about If you like, you can call me directly at (618) in Washington is replete with pushed by our rookie President We’re on the Web at: 397-1002 to discuss your financial situation. Or similarly economically absurd and the Clinton administration retreads that make up the key email me your questions at numbers that simply don’t add members of his economic team. There’s never any up, yet nary a word of challenge We want to thank President Bush for We’re opposed to them for one obligation. We’re here to do all we can to help from the “capitalists” among us. keeping our country safe for 2689 you survive the most difficult and challenging days after September 11, 2001. simple reason, they won’t work. investment environment of our lifetime.(2) God Bless you Mr. President. (Continued on page 3) 1) It took all of 15 minutes to research the numbers, it seems to me it would be relatively easy for someone on Capital hill to score politi- cal points with such figures. But then again maybe not. 2) All information provided to us is held in strict confidence!
  2. 2. Page 2 Year End 2008 VIEWPOINT VIEW FROM THE FRONT SEAT by Mark J. Deschaine Our Fix for the Economy? How about Eliminating All Corporate and Business Income Taxes! T And so it is with our newly ensconced corporations; they’ve got gobs of money.” The IMING IS EVERYTHING. President Obama and his fellow Democrats in Congress. They’re truth is, businesses don’t pay taxes, they passed on salivating at the prospects of assuming power at a moment in time when all their tax burden to consumers in the form of the slumping economy is handing them the mother-of-all opportunities to higher prices, to workers by offering fewer jobs and expand government. And not in small increments as is usually the case, but lower wages, and to shareholders with lower re- in colossal and profound ways. As far as Obama (and again his fellow Democ- turns on their investment. Since 2000, taxes collected by business for the government averaged rats in Congress) are concerned, it’s 1933 and happy days are here again. The problem is Obama’s spending plan isn’t any more likely to fix our economy about $229 billion a year, ranging from a low of $132 billion in 2003 to a than FDR’s spending did in the 1930s. FDR’s massive high of $370 billion in 2007, which averages out to about Fixing the Economy 10% of the Federal government’s total revenue. Notice I government spending (for the period anyway) didn’t bring the “Businesses don’t pay country out of the Great Depression, World War II did. said “collected,” (of course you did) because businesses don’t Some economists even believe FDR’s New Deal pro- taxes, they collect them. pay taxes, they just collect them. Not only that, but it costs Eliminating them would businesses millions each year just for the privilege to act as grams prolonged the Great Depression. But Obama isn’t about to let history keep him from lower the cost of doing a tax collect for government. For instance, Warren Buffett passing an $850 billion goodie-bag of campaign promises business, generate cash to estimates that it costs Berkshire Hathaway about $29 masquerading as an economic stimulus plan. Obama pay down debt, attract million to file his company’s 9,000 page tax return each claims he’ll create (or save) 3.5 million jobs over two years. foreign capital, simplify the year. (Yes, nine-thousand pages). If we divide $29 million by What you won’t hear from the omnipotent one and his tax code, and make the U.S. $50,000 then Berkshire’s tax filings expense alone repre- minions in Congress is just how much all this government the most competitive sent 580 potential jobs. And that’s before counting the spending is going to cost each of us. Note the $850 billon economy in the world. $6.6 billion in federal taxes his companies paid in 2007. It’s a plan that wouldn't comes on top of $700 billion already allocated under the Of course, if we eliminate all business income taxes; Trouble Asset Relief Program (TARP) passed in Septem- cost the taxpayers a dime! how does government replace the $225 billion in lost ber. But even those numbers dramatically understate the Which means it’ll never revenue? Here’s how. First, put business on a cash basis total amount of federal money allocated in the last four happened. accounting system. The current accounting system known months to try to fix the economy. Bloomberg estimates as the generally accepted accounting principles, or that the government has committed a total of $8 trillion in an effort to fight GAAP, is a mess and dramatically understates the true cash generated by the deflationary cycle now engulfing the economy. The $8 trillion averages the average business. In the extreme, it completely distorts it, think Enron. out to a total of a whopping $58,148 or $29,074 a year for the two year For the stocks in the S&P 500, earnings using “GAAP accounting rules” period of the program for each of the 135 million tax returns. reflect less than 40% of usable cash generated by the business each year. If those numbers seem absurd it’s because they are absurd. What’s The significance of cash verses accounting is that companies spend also absurd is that Congress is finding it difficult to allocate this massive billions to manipulate the accounting data for one purpose—to minimize infusion in capital to the sectors of the economy most in need. If the bu- their tax liability. If we put all businesses on a cash basis, they would not be reaucrats in Washington can’t allocate the stimulus effectively why not send able to manipulate the company’s earnings allowing for much greater trans- a $29,000 check to the 135 million tax filers each year and let us decide how parency. The company either produced a cash profit or it didn’t. Under best to allocate our money. Many would pay down debt strengthening their cash basis accounting, revenues coming in each year would be measured by personal balance sheets. Others might buy a new car, thus helping the bank deposits and expenses would be measured by checks written to pay struggling auto makers. Some might even venture into the depressed real bills. The difference between the two is the company’s cash profit, (or loss). estate market and buy a house. And yes, many will simply save the money Businesses would then be required to pay out half of the cash flow in a bank account helping the banking system stabilize. Even crazier, some “profit” as dividends to shareholders which would be taxed on their tax might invest it in the stock market helping to boost stock prices. You may return at 15%. The other half of the profits would be retained by the com- think my idea sounds crazy, but isn’t that essentially what Team Obama pany and invested in the business tax-free to generate future cash flow. and his bench-mates in Congress are doing? That means the effective tax rate on business profits would be 7.5%. The What if I told you there’s a way to stimulate the economy, strengthen lowest in the industrialized world. As a result we would be the most com- the stock market, end the shenanigans of accounting manipulation, lower petitive economy on the planet. Our trading partners would have to lower the cost of doing business, generate massive new cash flow allowing busi- their business taxes to compete or they’d be left behind. Believe it or not nesses to pay down debt and hire new workers, attract billions in new capi- this tax structure provides the same level of revenue to the government tal and investment in our country by foreigners and dramatically simplify while at the same time eliminating the need for companies to spend mil- the cumbersome and outdated tax code—all at little or no cost to taxpayers lions to prepare tax returns. It would generate cash flow for companies to or the government. Most of you would ask: what are you smoking? grow their business, hire new workers and attract foreign capital. So how do we achieve all of these wonderful objectives? Simple, It’s a winning plan at no cost to us as tax payers. But it involves cut- eliminate all corporate and business income taxes. ting taxes, which Obama and the Democrats would never go for. Besides, Most Americans see taxing business as a good thing. “Tax those evil they wouldn’t get to control our money. Which means it’ll never happen.
  3. 3. Deschaine & Company, L.L.C. Page 3 As we’ve expected and have discussed at decade will get stuck with the bill in the form (Continued from page 1) The voters may have bought a bill of goods length over the last three years, the unwinding of a debased currency, (i.e inflation) the afore- when they voted for change in the last elec- of the debt bubble is unleashing deflationary mentioned price haircut on their assets and tion. If Obama and the Democrats in Con- forces which are pushing down asset prices at probably cut off from access to new credit. gress get their way, and it certainly looks like an unnerving clip. While we saw it coming, Rather than letting the fiscally foolish they’re going to, we’re going to get change we’re the first to admit even our pessimistic like Fannie and Freddie, Citigroup, and GM alright. Yet, is it the change voters thought expectations didn’t anticipate the speed or and Chrysler go the way of the do-do bird— they’d get when they pulled the lever last severity of the crisis. Price declines in asset cleansing the system of a massive misalloca- November? But then we’ve gotten ahead of categories from stocks, to real estate to a tion of capital in the process—our benevolent ourselves. Read on for our unsalted opinion of barrel of oil are painfully and relentlessly government is fighting deflation by throwing more than $10 trillion in new credit at the what we think is coming and what we plan to do washing away wealth like a sand castle at high about it to protect our hard earned assets in tide. Wealth that was in many respects built system hoping to stabilize credit markets and what is certain to be the most difficult and chal- on artificially cheap and easy credit in the first halting the slide in the economy. lenging investment environment of our lives. place it should be noted, but it’s painful and Foolishly, (is there any other way for govern- discombobulating just the same. ment to behave) most of the money has been A brief survey of the financial landscape handed out to many of the same people who It’s all about the Political (Economy); Stupid! shows stocks (world-wide) down more than perpetrated this mess in the first place trans- It’s obvious to us, and we should know be- 50%, housing down more than 25%, and the ferring trillions in capital to the least efficient cause we’re masters at picking up on the obvi- barrel of crude oil, down a whopping 70% segments of our economy in the process. All ous; our economy’s in the worst shape it’s from their respective highs. Of course, by this intervention and massive incursion by the been in since at least the early 1970s and quite now mentioning declining asset prices is be- government in the private economy, much to likely since the Great Depression. And we’re side the point. What’s most pertinent is that our dismay, is taking place under a supposedly talking the world economy, because there’s not we don’t think the bottom in prices—in any “conservative” administration. an economy on the planet that’s been spared the asset category—has yet been reached, or is Again, not to belabor the obvious, but ugly downside to the credit bubble. not likely to be for some time. isn’t the prescription for the ailing economy Needless to say, if the average stock precisely the cause of the crisis. As James We say: Blame it on Reagan market mutual fund is down 50% over the last Grant pointed out in the December 20, 2008 I 12 months than a lot of folks are down more Wall Street Journal; “In the boom, a superabun- N THE ENDLESS SEARCH FOR SCAPEGOATS for our current economic plight, we nominate Ronald than 50%. Compounding the financial pain is dance of mispriced debt led countless people down Reagan. That’ll come as a shock to veteran VIEW- the fact that investors are being whacked on innumerable blind investment alleys. E-Z credit POINT readers because they know we hold Reagan in multiple fronts as their investments plummet, financed bubbles in real estate, commodities, mort- near reverence for cutting our taxes and containing their home values plunge and their purchasing gage backed securities and a myriad of other assets. inflation by controlling the growth of money in the power declines all taking a heavy toll on their It punished saving and encouraged speculation. early 1980s. But recently it occurred to us that much of financial security. The only positive is the Imagine a man at the top of a stepladder. He is up our current economic problems can be directly traced recent plunge of oil prices from $141 a barrel on his toes reaching for something. Call that some- back to two of his high profile appointments. in July to less than $40 a barrel has driven thing “yield.” Call the step ladder “leverage.” Now The first was his selection of George H.W. Bush gasoline prices at the pump to the lowest kick the ladder away. The man falls, pieces of debt as his running mate in 1980, thus saving Bush 41’s political career in the process. The only thing Bush is they’ve been in three years, providing some crashing to the floor around him. The Fed, watch- remembered for is breaking the only promise he ever relief for consumers in the process. ing this preventable accident unfold, rushes to the made, (again, not that anyone remembers) by reneging on All told, the cumulative financial losses scene too late. Not only did Bernanke et al. not see his “Read my lips, no new taxes,” pledge in his 1988 so far in the down side of the credit bubble it coming, but they actually egged the man higher. Presidential campaign. He did so when he agreed to are in the trillions while the untold human You will recall the ultra-low interest rates of the raise the top marginal tax rate from 28 to 31% in a suffering from the economic slowdown could early 2000s. The Fed imposed them to speed recov- budget agreement with George Mitchell (D-Senate very well go on for years. ery from an earlier accident, this one involving a Majority Leader) and Tom Foley (D-Speaker of the House). man up on a stepladder reaching for (overpriced) The only thing the “agreement” achieved was to push Curing the Disease by Killing the Patient technology stocks.” the economy into a recession and cause Bush to lose the 1992 election to Clinton. Without Bush one, it’s Don’t misunderstand, we don’t poke fun The Bush administration and the Federal unlikely we would’ve had the economic disaster that at the crisis out of insensitivity, it’s just our Reserve responded to the crisis caused by easy was Bush II. way of pointing out the madness of trying to money fueling excessive credit by what else, The other appointee? Why Alan Greenspan as solve a problem made up of too much bad extending trillions in new credit to just about Fed Chairman in 1987. Greenspan spent the next debt by supplementing it with, ah, more debt. every corner of the U.S. financial sector. That nineteen years printing money anytime the economy As we wrote in VIEWPOINT last year: is, with the notable exception of normal every ran out of gas and by doing so pushed the day of “In all seriousness, as much as we appreciate the day, responsible and credit worthy borrowers. reckoning of each successive credit bubble until now. Fed’s efforts to keep the financial system from a No sir, responsible individuals and enterprises So, as much as it pains us to denigrate the big that prudently managed their affairs and didn’t guy, we see no alternative but to blame our current (Continued on page 4) economic plight on Reagan. Ouch! go on a drunken credit binge over the last
  4. 4. Page 4 Year End 2008 VIEWPOINT next four years. A massive intervention in the tunately, no one, especially in Washington (Continued from page 3) complete meltdown, (which, just so you know, we economy in the form of direct investment, sees it that way, or are willing to challenge the don’t favor) we also recognize there are two very loans and loan guarantees, subsidies and the very notion of government as job creator. painful consequences of the Feds actions. greatest infrastructure spending and govern- “This is the best deal since 1932,” said First, as much as everyone would like to ment directed investment since World War II. House Financial Services Committee Chair- think the current credit crisis can be resolved simply Couple that with what is sure to be the man Barney Frank (D-Mass) regarding the by the Fed plying the financial system with large greatest re-writing of industry regulation since increased public appetite for government piles of money, that’s just not the case. Believe it or the 1930s saddling a struggling economy and intervention in the economy. “You never want a not (and we know we're going to disappoint some the plunging financial markets with the added serious crisis to go to waste,” in-coming White folks when we say this) the Fed can’t prop up the burden of more government just as they be- House Chief of Staff Rahm Emmanuel told stock market (or the economy) each time it threatens gin to recover. the Wall Street Journal. House Majority to unravel over every crisis that happens along. Leader Steny Hoyer, (D-MD) endorsed the A Ray of Hope or just Audacity? Second, as Newton’s third law of motion latest estimated $800 billion package but be- states, “for every action there is an equal and oppo- lieves the administration needs to do more to On Meet the Press, Obama advisor Bill Daly site reaction.” In the case of the Federal Reserve, the address home foreclosures and that “a large suggested that Obama has “kind of” put on “reaction” to their actions is a little phenomenon stimulus package must be enacted in the short term.” hold his plan to sock-it-to the rich. Daly said; known as “inflation.” In case you haven’t noticed, (Obama will) “more likely than not” delay a tax prices on everything from stocks to real estate to We’ve seen this Act Before increase for the rich until 2011, after the Bush gold, as well as commodities from corn to oil have tax cuts expire, rather than repeal them now. Despite compelling evidence to the contrary, been setting record prices of We don’t take this as a change of heart, it is still generally believed, at least among late. The price of an ounce of only a pragmatic nod to the political reality Democrats in Washington, that FDR brought “There is a gold, as just one example, has that repealing the Bush tax cuts now would us out of the Great Depression by spending fundamental more than double since 2005. likely lead to a disastrous election for Democ- money. But as FDR’s own Treasury Secretary, difference between The price of a barrel of oil is rats in 2010 and single term for the new guy. Henry Morgenthau testified before the House taxing people to up more than 500% since To try to stimulate an economy in need Ways and Means Committee in 1939: “We are pay the necessary 1999. of electric shock, Obama asked his economic spending more money than we ever have spent before As investors have found expenses of team to come up with a spending plan to and it does not work. I want to see this country pros- out several times since 2000, government and “jolt” the economy, with an objective of sav- perous. I want to see people get a job. I want to see asset price “inflation” is just taxing them to ings or creating 3.5 million jobs by 2011 and people get enough to eat. We haven’t made good on our fine on the way up, like when urged the new Congress to have a plan ready transfer their promises. I say after eight years of this administration, stock or real estate prices are for his signature as soon as he takes office. earnings to others, climbing, it’s just the long and we have just as much unemployment as when we Obama described his stimulus package started, and enormous debt to boot.” The lesson: in exchange for painful slide down the other as a “two-year, nationwide effort to jumpstart We couldn't spend our way to prosperity votes.” side of the price spike that’s job creation in America and lay the founda- then and we can’t do it now. But is any- —Thomas Sowell, 1993 the killer.” tion for a strong and growing economy.” He body in Washington listening? said; “We’ll put people back to work rebuild- Upping the Ante on Bush ing our crumbling roads and bridges, modern- So Much for Change! Of course, it’s hard to make a case for inflation izing schools that are failing our children, and “Can Government Really Create Growth? in the face of rapidly “deflating” prices and a building wind farms and solar panels, fuel- By Mark Deschaine, January 1993(3) sinking economy. While that’s true in the short efficient cars and the alternative energy tech- A BRAHAM LINCOLN ONCE SAID, “You run, eventually the exponentially accelerating nologies that can free us from our depend- can fool some of the people all of the growth in the supply of money will win the ence on foreign oil and keep our economy time and you can even fool all of the people inflation argument. Especially, when we consider competitive in the years ahead.” some of the time, but you cannot fool all the Hum, if that all sounds familiar, it should. that President Obama is more than willing to people all the time.” That axiom was proven It’s Obama’s campaign platform all neatly accelerate the pace of spending—exponentially once again this past November 3rd (1992) as rolled into one big spending plan. again—all in an effort to “borrow and spend” Governor Clinton managed to convince 43 the economy out of its precipitous slide. percent of the electorate that the public sector From a “Private” to a “Political Economy” We’ll spare you the subtleties, as we note (otherwise known as government) can produce at the top of page one of last quarter’s VIEW- “We live in a more and more politicized economic growth and create jobs simply by POINT, if government spending or loans to economy, which is to say that we need raising taxes and spending more money. The prop up failing businesses (or whole industries) to pay even more attention than ever to fact that Clinton was able to sell his program was the route to economic prosperity, then government action.” — David Galland to the voting public is testament to both Clin- Argentina would be the richest country in the Of course, saving and creating jobs is the role ton’s salesmanship and the voting public’s world. Yet, despite the overwhelming eco- of the free market, not government. Further gullibility in the face of overwhelming histori- nomic evidence to the contrary, that’s pre- “stimulus,” reminiscent of a “new” New cal evidence to the contrary. Actually, if you cisely what Obama intends to do over the Deal, is a recipe for economic disaster. Unfor- (Continued on page 5) 3) This article was published in January 1993, just prior to Clinton’s inauguration. Which goes to show, how little change is in the “change” being offered by Obama.
  5. 5. Deschaine & Company, L.L.C. Page 5 on business investment or consumer pur- (Continued from page 4) “Saving” the Auto Makers think about it, it shouldn’t come as a surprise chases of homes, furnishings, automobiles Throwing Good Money After Bad? that Clinton was successful because the in- and other goods and services. In fact, you Making cars is difficult. Or more accurately, vesting public (just like voters) has shown them- have made the economy weaker by taking the making cars at a profit is difficult. It takes a lot of selves quite susceptible to being sold a bill of money out of it. If you then return that capital to run a car business. Capital for plant goods time after time. Rarely a week passes money to the economy via government pro- and equipment, engineering, design and devel- without a story about a scam perpetrated on grams, whether for roads, bridges, job train- opment, marketing, shipping, dealership sup- the investing public in Forbes, Business Week ing, etc., you may produce some short-term port, etc., and the list goes on. Then every few or Wall Street Journal. So it’s understandable public employment in those specific sectors. years you have to spend a pile of money to re- that Clinton was able to sell his “government But you will not have produced any new jobs tool to do most of it all over again for a fancy spending creates jobs” premise to the voters. by doing this. In macro-economic terms, the new model. If you re-tool an ugly new model, Each time I read a story about a scam, I impact is virtually zero. You are merely put- say an Edsel, or if you tool up to build a lot of ask myself, how can so many reasonably ting back, minus the government’s costly cars and sales drop like a stone, because of such smart people can get sucked into such obvi- overhead charges, what you have taken out of fixed overhead, you’ll quickly run out of ously fraudulent deals? Then I came across an the economy in the first place. There can be money. Companies die when they run out of article written by a former con-artist in which no impact, other than the continuing burdens money. GM, Chrysler and Ford to a slightly he outlined his techniques for pulling off his that remain on the economy when the taxes lesser degree, have essentially run out of scams. What’s fascinating about the average remain long after the roads and bridges and money. They should be allowed to die a digni- investment scam is that they all rely on the other public works projects are completed. fied death. same basic psychological hooks over and over In the end, the economy will be weak- To demonstrate how difficult it is to make again to lure their victims. ened even further as a result of continued cars at a profit and stay in business consider Do you know what the most common spending increases and higher levels of taxa- that between 1900 and 1910 over 3,000 manu- denominator is among investors who have tion—all of which must come out of the factures took a shot at building cars in the U.S. been scammed? They have been scammed lifeblood of the economy, the earnings of its By 1930 there were about 30 major manufac- before! That’s right! When a con-artist is out businesses and workers. tures, by the 1950s less than 10 and today the looking for a potential victim to lure into a This is the Keynesian economic model last three U.S. car makers stand (barely) on the new scam, who does he look for? Someone that Clinton skillfully sold to 43 percent plu- brink of bankruptcy if they don’t get help from who has been successfully scammed in the rality of the nation’s voters. He and his eco- the government—and soon. past, because he knows that if this victim has nomic advisors are going to get a chance to What most people don’t realize GM, Ford bit in the past, it is highly likely he’ll bite again. see if it works in January, when the economy and Chrysler have already spent over $500 bil- How does the con-artist then success- may be showing some additional signs of life, lion in the last decade in an effort to “fix” their fully lure his potential victim (remember, the guy’s but which the government seems to ready to businesses and they have nothing to show for been duped at least once already) into biting again? suffocate with more taxes, more spending and the money. For a half a trillion dollars, the three First, by making the scam sound so simple it more regulations.” could have closed all of their facilities and ac- has to be true and second, by repeating it so Richard Rahn, the former chief economist quired Honda, Toyota, Nissan and Volks- often that the victim is literally brainwashed for the U.S. Chamber of Commerce, talked wagen. It’s time to cut our losses and invest our through sheer repetitiveness into believing the about this economic theory in testimony before scarce capital in industries and companies with scam. Doesn’t that sound an awful lot like the Joint Economic Committee of Congress just more long-term potential to create jobs and Governor’s Clinton’s campaign rhetoric of three days before the election. His testimony, a economic wealth. selling the myth that government spending lesson in economics of growth verses the eco- P.S. Why should taxpayers bailout Chrysler, i.e. can create economic growth and jobs? nomics of redistribution, should be read by Cerberus, the private equity group that bought Chrysler, For one it sounded simple, raise $150 anyone who believes that entrepreneurial capital- and GMAC, the financing arm of GM in 2007? billion in new taxes from people who save ism is the greatest engine of social change and They made their choice, let them deal with it. You can and invest the most (read those that create the upward economic mobility. bet they would’ve reaped the benefits had the deal most economic growth) and spend $220 billion, In his usually no-nonsense style, Rahn worked. Besides, no ones bailing us out of our losses in (borrowing the difference, although that was never delivered a devastating critique of what is the the stock market over the last year. specifically articulated as such during the campaign) heart and soul of “Clintononmics: “the claim over the next four years on high profile public that government spending creates jobs.” works and construction programs. Second, to true. However, repeating a falsehood, no Rahn told the committee, “One needs 43 percent of the voters at least, the concept matter how compelling, doesn’t make it true. only to realize that government cannot spend rang true. Why everyone knows government Donald Lambro, in a recent Washington money without either taxing or borrowing it spending creates jobs, just look at all those high- Times article, pointed out the fallacy behind from the private sector, and the extraction way workers laying asphalt and repairing bridges. the myth that government spending creates costs of taxation and borrowing are very high, Finally, the lie is repeated often enough; prosperity. He wrote: “If you take money out to understand the silliness of the claim that in the case of Clinton, every day for at least of the economy through taxes or borrowing, government can “create jobs.” the last eighteen months than it had to be that’s money that would otherwise be spent (Continued on page 6)
  6. 6. Page 6 Year End 2008 VIEWPOINT President supports policies that grow the to an economic recovery, while today the (Continued from page 5) Rahn, went on to say, “The economy is government faster than the economy, the economy is heading for what may be a long weak because government spending is taking economy declines, the budget deficits grow and painful slow down. The relatively modest too much out of the economy through ineffi- and the sitting President has a difficult time (by today’s standards) growth in government cient taxing and borrowing and directing it to getting re-elected. Just ask George Bush. under Clinton was largely absorbed by a the weakest sectors of the economy in hopes Unfortunately, it appears Clinton’s bent on growing economy. Still the tax increase the of propping them up at the expense of growing the government at the expense of the Democrats pushed through in late 1993 was healthy growing sectors. When government private sector. If that turns out to be the case, unpopular with voters none-the-less. This curbs spending and cuts taxes, the economy we expect slow economic growth until we see time around, however, the plans for govern- always regains its health.” policies that promote the growth of the pri- ment spending, taxation and regulations are “The evidence for this is in the eco- vate sector over the growth of government.” on a scale that’s never been tried before. So So much for the newness in Obama’s nomic record of the last 30 years,” Rahn there’s really no historical road map to give us message of “change.” Insert Obama’s name notes. “We experienced two high growth an idea of how all this periods from 1962 through 1966 and from for Clinton’s in the commentary written in massive government might shake out. A t “To compel a man 1983 through 1989. We had low growth and January 1993, and it applies today. It’s instruc- the same time, it’s possi- to subsidize with high inflation from 1967 through 1982 and tive to note that Clinton’s first two years in ble the initial “jolt” to his taxes the slow economic growth since 1990. Both high office were not his best and as a result the the economy by all the propagation of growth periods were characterized by eco- Republicans took control of Congress in the nomic policies that included cutting marginal 1994 mid-term elections. In the case of the government spending ideas which he income tax rates and keeping government House of Representatives, the Republicans might cause it to turn disbelieves and spending below the growth in nominal GDP, took the majority for the first time since 1954. direction, if just in the abhors is sinful and restrained regulatory growth.” Clinton, being the most adapted politician in a short term. Long term, and tyrannical.” “In both cases,” Rahn said, “only when generation, was famously able to “triangulate” the government’s inter- —Thomas Jefferson we succumbed to higher levels of government the Republicans and his own party in Con- vention will likely quell spending and rapid growth in regulations did gress to win re-election in 1996. But then, he the “animal spirit” of the economy leave the high economic growth also had the good fortune to run against a entrepreneurship in the private sector and path,” he concluded. tired and underwhelming Bob Dole. therefore dampen economy growth for years. Rahn who correctly forecasted the 1990- There’s been much made in the press of The Keynesian Fallacy 91 recession, is pessimistic about the econ- the Obama camp being mindful of the Clin- omy next year, (1993) predicting after a cou- ton experience and how they’re determined By David Galland, Managing Editor ple of reasonably robust quarters of growth: not to make the same mistakes. However, An Excerpt from the January 2009 Casey Report O “we’re likely to slip back to the meager eco- there is a big difference between then and N SEVERAL OCCASIONS we’ve heard nomic crawl we’ve experienced over the past now—the economy. Clinton took office in the phrase, “We are all Keynesians year. This is likely to occur if Congress agrees 1993, just as the economy was well on its way now,”(4) as a canny way of expressing the idea to create a new income tax rate of 36 percent that the free market is dead. And that the fate “Change” It Don’t Come Easy to 37 percent, boost spending as a share of of the global economy now relies almost the nation’s total output and add new layers of entirely on pragmatic measures yet to be taken “The U.S. standard-gauge railroad track is regulation, all in the name of strengthening by governments, most notably that of the four feet, eight and a half inches wide. Why the economy and creating jobs. United States. Given that the word such an odd measure? Because that was the Now, before I’m permanently branded a “pragmatic” is often used to describe Presi- width in England and the United States when Clinton basher, I want it duly noted that I dent Obama, it appears that the man of the railroads were built by British expatriates. wish him well. It’s not in our interest as an hour has arrived just in the nick of time. Not Where did the English get that measure? The investment advisor to see the economy strug- to be a spoilsport, but there’s much wrong first rail lines were built by the same people gle or the stock market languish. It is just that with this premature entry in the annals of who built the tramways that preceded rail- I don’t see how government spending gets us presidential folklore. roads. They built the trams with the same jigs there. What I favor are policies that promote Even practicing skeptics like us have to and tool used for building wagons. The wag- economic growth, create jobs and make stock admit Team Obama has done an amazing job of ons were built to that width so their wheels prices go up—ideally a lot. The fact is, pro- spinning pragmatism into the Obama brand. It would fit the ruts of England’s ancient long- growth economic policies would make my job is another thing altogether to actually demon- distance roads. The ruts had been made by easier and if it meant Clinton gets re-elected, strate pragmatism when he actually sits in the the war chariots brought to England by the that’s just fine by me. Oval Office and the whole world waits breath- occupying Imperial Roman army. And the What’s important is that history clearly lessly for his next utterance. chariots were that wide to accommodate the shows that if the country has policies that I’ve heard Obama supporters comment rear ends of two horses, side by side. So enable the economy to grow faster than gov- lately that “if the private sector won’t spend money, you’re not alone if you struggle with change.” ernment, the economy booms and the Presi- — Don Connelly dent gets re-elected. If, on the other hand, the (Continued on page 7) 4) Richard Nixon first uttered the phrase after taking the country off of the gold standard in 1969. Notably, that move lead to the crash of 1973-75, and the stag-flation for the rest of the 1970s under Jimmy Carter. Hum, not a pretty example to emulate, don’t you think?
  7. 7. Deschaine & Company, L.L.C. Page 7 make quick decisions that we often regret. We What Do We “Do?” (Continued from page 6) annoy other people and tend to bring out the then the government has to.” Like beauty, pragmatism, it seems, By Marnie E. Deschaine worst in them. When an opportunity knocks, is in the eye of the beholder. What Obama might consider we are usually too overwhelmed or frustrated to pragmatic–soaking the successful, slapping on an energy tax, Mark has taken me up on my offer to contrib- see it. If we do see it, we’re usually overly revving up the money engines ever higher—might be con- ute to VIEWPOINT (at least for this issue). If critical and negative. sidered by others, yours truly included, to be very un- you enjoy what you read, let him know and The responsive mode, on the other hand, pragmatic. That’s because even if Mr. Obama is a pragma- maybe he’ll give me my own column. My goal is is our most relaxed state of mind. Being re- tist, the same can hardly be said of the American public, who to share some thoughts that may be particularly sponsive suggests that we have our bearings. have been lead to believe he’ll work wonders. helpful in this new year. We see the bigger picture and take things less Ironically, it is his very pragmatic nature that could be I personally. Rather than being rigid and stub- his undoing given the unrelenting nature of our nation’s and fi- T SEEMS THE ECONOMY born, we are flexible and calm. In the respon- election cycles. And we’re not referring just to the next presi- nancial markets have pretty much sive mode, we are at our best. We bring out the dential election cycle, which won’t kick off for another two everyone living in a state of anxiety to best in others and solve problems gracefully. years…but to the next Congressional election of November one degree or another. We hear, see or When an opportunity comes our way, our 2010, less than two years hence. In that election, one third of read about it every day. Every negative mind is open. We are receptive to abundance. the Senate and a smaller percentage of the House of Repre- event or set back seems to be “because Once you are aware of these two drasti- sentatives will be up for grabs. With history as a guide, we’re of the economy.” Some of us are aware cally different modes of being, you will begin to going to hypothesize that few of Mr. Obama’s supporters in of this state of unease and others may notice which one you are in. You will also Congress, avid though they may be, will be willing to make remain unconscious to it. In fact, I can’t notice the predictability of your behavior and their reelection campaigns more difficult by supporting help but think that our collective “state feelings when you are in each mode. You will unpopular legislation . . . no matter how pragmatic. Sure, maybe of anxiety” actually contributes to our observe yourself being irrational and negative in they’ll inch a little way out on the limb during a brief honey- current economic situation. (We can your reactive mode and calm and wise in your moon period. But, once the 24-hour news-as-entertainment tackle that in another article . . . ) responsive state of mind. channels start in with a vengeance, cracks in the voting coali- When we feel fear and anxiety; Simply becoming aware of the different tion will begin to appear causing Obama to turn from mak- worry arises within us. We begin to dynamics of your mind will open the door to ing “hard choices” to the “easy give aways” the American project negative stories about our future tremendous changes in your life. You’ll begin to public requires for continuing to support his party come adding to our anxiety. We then scram- notice when you fall into a reactive state of November 2010. After that, we move seamlessly into the ble to fix the problem; we ask, “What mind. You will feel your own impatience. next presidential election cycle, and things will go downhill do we do?” which causes us to begin When this happens, simply say to yourself, from there. Of course, this situation is not unique to De- “doing”. We “scramble” to fix the “Whoops, there I go again” or something to mocrats–rather, it is an intractable and, in time, terminal problems. In this mental state, we’re not this effect. Any type of simple acknowledgement disease of our late-stage democracy itself. really conscious and certainly not per- will do the trick. You will discover, as you Even ignoring the near impossibility of organizing forming at our best. Maybe what we notice and acknowledge your own reactivity, consistent and sensible government policies in a rapidly really need is to “NOT” do anything. coupled with your understanding that, in all degrading democracy, the whole idea that a government can (Unless, of course, if “doing” means hiring a cases, it pays to be more responsive, you will effectively manage an economy–Keynes’ central theme–just competent investment manager—hint, hint). quickly come out of a reactive mode and fall doesn’t hold water. Despite hundreds of experiments along Maybe, we need to simply become into a more responsive state of mind. those lines, none has shown any real durability. aware and accept what we feel for a A responsive state of mind is fertile There have been some examples, however, of long- moment. In this state, peace will enter ground for success. When your mind is clear term free market successes, the most powerful being the and answers will come. and relaxed, you pave an open channel for early, laissez faire days of the United States. There are lesser The late Richard Carlson said it abundance and joy. There is a direct and clear examples such as Dubai in recent decades, or Hong Kong insightfully in his book, Don’t Sweat the relationship between how much time you spend under the British – economies where the operating manual Small Stuff About Money. I hope the in a responsive state of mind and your own was thin and almost entirely supportive of wealth creation following excerpt will help you awaken level of success. The more you are able to stay and free markets. Were they perfect? No, because there is no to a little more peace in your life in the out of reactivity, the more opportunities will such thing as a perfect world. But in terms of creating the New Year and beyond. He wrote: “In present themselves. Beginning right now, use the wealth needed for a society to advance to a more refined business and in life, we have essentially two power of responsiveness to create your own stage, they performed exceptionally well. In sharp contrast, psychological modes that we are in most of the success.” today’s freshly minted Keynesians call for increased penalties time: reactive and responsive. The reactive mode The simple practice of being aware on success and a steep ramping up of regulation, the very is the one that feels stressful. In it, we feel of my thoughts throughout the day has opposite of the prescription needed. pressured and are quick to judge. We lose given me a more joyous and peaceful There is another problem with the utopian aura now perspective and take things personally. We’re life experience. Maybe it will enrich your surrounding Team Obama, and it’s simply that government annoyed, bothered, and frustrated. life in the new year as well. doesn’t produce anything tangible. Someone I know tried to Needless to say, our judgment and May the New Year bring you growing counter that proposition by pointing out that the Internet decision-making capacity is severely impaired awareness, abundance and peace. MED (Continued on page 8) when we are in a reactive state of mind. We
  8. 8. Deschaine & Company, L.L.C. Page 8 depends equally, and maybe even more so, on others. And tort lawyers and prosecutors will (Continued from page 7) was incubated by DARPA, a government correctly anticipating what actions the govern- likely find it shooting fish in a barrel to hold agency. Such a view completely discounts the ment is likely to take (or not) in regards to any various “advisors” liable for steering clients presence of telephones, electric lighting, com- particular enterprise. By any possible metric, into the Madoff scam. puters, etc. Government or not, the Internet save one, GM may be a dead man walking, In no book of wise investing however, is it would exist. but the one metric that counts most is written: “Entrust all your money to magical Regardless, when it comes time to whether the government will decide to prop figure who claims to produce uncannily consis- “manage” the economy, government is left the company up. tent profits by means he refuses to explain.” Nor with only a couple of tools. One is to force In all the rhetoric coming out of the is it written. “Pay princely commissions to any you and me to use our time and capital for Obama camp during this transition period, perfumed popinjay who can open the door to purposes they view as important. Bush, for there is much talk about Keynes and the need this mystical kingdom.” example, felt invading Iraq was a priority. for an activist government, and pitifully little Barney Frank (D, MA) didn’t help by Naturally, Team Obama has a slate of fresh that is actually encouraging of the free market. fibrillating on Monday that investors everywhere ideas on the best use of your money, and say And so, despite the brave new world packag- would be afraid to invest after Mr. Madoff. Mr. they want even more of it. I take umbrage at ing, the ideas trotted out by the Obama team Frank would have done better to emphasize the the notion that I should open my wallet even so far strike me as all straight out of the recy- many ways a mutual fund, and even most hedge further for “the public good,” especially when cling heap. The only real question at this point funds are different from a Madoff scam, begin- the perceived public good so often runs con- has to do with intensity. Or, rather just how ning with an independent custodian of the un- trary to my own beliefs. For instance, on far are they willing to go in push their agenda? derlying assets. principle, I am against war–it is Better yet, Washington always the innocents that suffer might spend its time profitably the most. And I’m against the examining its own role in the creation of new and expensive recent housing blowout, which regulatory structures, a govern- has destroyed more wealth than a ment specialty. To quote Thomas hundred Madoffs, of which Mr. Jefferson on the topic, “To com- Frank himself is an expert.” pel a man to subsidize with his T taxes the propagation of ideas HE  DISMAL  TRACK  record  on  which he disbelieves and abhors is government  spending  as  an  sinful and tyrannical.” economic  stimulus  should  be  clear  The other tool available to to anyone willing to look honestly at  Team Obama is, of course, the the historical data. It is equally clear  creation of money. And we are that Obama believes otherwise, and  now hearing a steady drumbeat that the massive government spend‐ that we the people should pay ing that’s occurred under Bush and is  going to continue under an Obama  no attention to the deficits for administration. Which will not do anything to correct  A Word About the Madoff Mess the next few years. the  credit  imbalances,  grow  the  economy  or  help  To which I can only wonder, “Isn’t that By now you’ve heard about the incredible revive  the  stock  market.  Much  to  our  dismay,  we  exactly what’s been going on for the last eight story of one Bernie Madoff, and his swindle think 2009 will be a continuation of 2008.   years?” It sure seems that way, considering the of $50 billion in client assets. Holman W.   Given  what  we  know  today,  we  expect  the  unprecedented levels of debt added to the Jenkins, wrote in the January 7, 2009 Wall economy to decline as much as 5% in Gross Domes‐ economy under Bush’s watch. Street Journal some well chosen words regard- tic  Product  for  the  year,  unemployment  could  ex‐ ing the Madoff affair, we excerpt them here: ceed 11% or even 12% by year‐end, and the stock  Something Old, Nothing New Journalism follows its own well-trod folkways, market is likely to have another rocky  year.   of course, and some now insist on trying to To the extent that there is an abundance of   We also expect interest rates to remain low at  make the Mr. Madoff symbolic of all that’s political as well as economic and investment least for the first half of 2009, but expect them to  wrong with our financial system. Yes, the coverage, this edition doesn’t reflect some begin to rise once the excess money in the economy  SEC, could have done a better job, but polic- hidden agenda, but rather simply acknowl- begins to push inflation higher.   ing side deals that rich investors make with edges that there has rarely, if ever, been a   For more specifics on our investment strategy  money managers arguably is not central to its period of time where the economy of the U.S. see the Year End 2008 VIEWPOINT Special Insert.   mission of ensuring fair and orderly markets. has been more politicized.   May God bless you and yours with a happy,  And the law is already well-equipped to clean Today it is not enough for an analyst to health and prosperous New Year in 2009.  up after fraud. Bankruptcy judges are versed paw through the fundamentals and correctly    As always, ah, thanks for reading. MJD  in the peculiar justice of “fraudulent convey- identify the best – or worst – sectors or even ance” that allows them to claw back Ponzi individual companies to be invested in or to profits from some client for the benefit of avoid. Success in the current environment VIEWPOINT is a complementary publication of Deschaine & Company, L.L.C. a registered investment advisor in Belleville, Illinois. This information has been prepared from sources deemed reliable, but its accuracy is not guaranteed. It should not be assumed that any securities discussed will be profitable or will equal past performance, or is it an offer to buy or sell any security mentioned. Deschaine & Company and/or one or more of its clients, employees, family or friends may have a position in the securities discussed herein. © 2009 All rights reserved. Reproduction of this publication is strictly forbidden without written consent from Deschaine & Company. This issue was published on January 21, 2009. If you would like to receive a complementary copy each quarterly, simply send us your preferred address (home or e-mail) to 128 South Fairway Drive, Belleville, Il 62223 or by e-mail to and we would be happy to add you to our lists. Rest assured no one from D&C will never contact you, unsolicited. We simply don’t have the time or the desire to hassle people.