Economist Opinions Can be Far Apart

In the midst of a deep global recession bordering on a depression, almost as bad as that of the 1930s, we see government pump-priming and stimulus budget-busting that ordinarily will induce extraordinary inflation, in time.

However, depressions also bring on the threat of deflation when economies collapse. Once they collapse they are hard to revive. The question: What is the bigger threat?

Here is where some economists worry more about the more immediate deflation than they do further off inflation.

History tells us that deflation is a shorter-term problem. Only a minority of economists look at the deflationary possibility. Pursuing that possibility, you do have an excuse to spend and spend, sometimes quite recklessly. Moreover, it is too often used by those who only have short-term political purposes.

You might say, the American financial meltdown of 2008 and 2009 were sown in the early years of the 21^st century when the Fed worried a bit too much about deflation and then loosened funds too much as its remedy.

Long-term, many economists envision catastrophic inflation.

Pareto Efficiency

Pareto efficiency, or Pareto optimality, is a concept in economics named after Vilfredo Pareto. The term is applied in engineering, game theory, and the social sciences. Pareto used the concept in studies of economic efficiency and income distribution.

Pareto claimed that a change from one allocation to another could make one individual better off without making any other worse off. This is referred to as a Pareto improvement. The allocation is then called Pareto efficient or Pareto optimal.

The 80/20 Efficiency concept is his reasoning. For example 20% of your sales force may contribute 80% of your sales.

Systemic Risk in Our Financial System

The Obama administration and Congress keep talking about how they want to prevent “systemic risk” from causing the next financial meltdown.

Their only problem: They have absolutely no definition of systemic risk, though we have all just lived through a huge financial meltdown. No one was able to recognize such risk in the past. No one will be able to foresee it in the future.

The question of what is risk has too many variables: The size of the financial institution under study is one. Other institutions involved will add to the mix. Political implications, and so on, down a list of potential complications are other considerations.

Much of the remedies of the past have been simply trial and error. The vast bulk have proven to be in error. Lehman Brothers and Bear Stearns are perfect examples of foul-ups.

Adding regulatory panels and czars merely exaggerates the mess with more potential human error of the past.

Balancing Stocks and Bonds in a Portfolio

It is becoming more evident that most investment advisers are no longer certain how much stocks and bonds are to go into what can be considered a “balanced” investment portfolio.

What had been a simple assumption prior to the recent financial meltdown is now subject to a lot of conjecture. That’s due to the fact both stocks and bonds fell in unison, and may react differently during recoveries.

The standard 60% stocks and 40% bonds balanced formula of the past may not be that standard. And change in formulae adjustment as investors age, no longer may hold. Some funds are offering “absolute returns” where losses could result under past stock/bond arrangements.

The solution? Flexibility. There is actually no set formula an investor can use for holding stocks or bonds. Too many factors will affect the choice.

Upcoming inflation. Retirement age and the health of both investor and beneficiary relationships come into play. And the possibility that bonds may return more than stocks in coming years. Even taking the inflation factor into account.

Does Dollar-Cost Averaging Work for Securities?

Quite a number of studies have appeared in academic literature on the subject of dollar-cost averaging when buying securities.

There is some evidence against the use of that strategy. Nevertheless dollar-cost averaging continues to be used by investors and is recommended by most financial advisers.

Besides its psychological appeal, the popularity of dollar-cost averaging comes from examples that show its use results in greater stock holdings across the stock market cycle, compared to a one-time, lump-sum investment.

The question whether it ought to be employed depends on the volatility of the markets. If the market for a security being bought is trending up, dollar-cost averaging can prove more costly. If the market will tend to be volatile, or erratic, such buying procedure will be more lower-cost.

Moral Hazards in the Financial News

The Obama administration constantly is attempting to undertake measures to prevent future financial meltdowns. It has what it feels are the experts in their attempt to regulate whatever is required.

However, those who are suggesting remedies are bound to fail. All they will accomplish is the message that they are doing something. In that respect they are simply doing what is expected politically. But financially, they are making a mess of things.

By creating what is supposed to be super regulation, all they are setting up are moral hazards. They give investors ill-conceived confidence that markets are being well supervised and secure, when they are not. So investors take bigger risks.

Or regulators give investors the impression the latter will be bailed out if the financial system runs into a debacle. The ever-bigger-risk cycle thus continues.

Moral hazards are what helped the recent financial meltdown occur, what with institutions “too big to fail” and so-called “bailouts” that did not really work as promised.

The Coming Stock Market Boom?

Wharton finance professor Jeremy J. Siegel says that history provides evidence that stocks will remain a good long-term investment because they are down about 50% from their peak.

Studies do show that when stocks are off so much from their highs, future returns are usually better. That doesn't guarantee short term performance, or that the following year will be better, but improvement can be expected over time.

However, this longer view remains to be seen under present economic circumstances.

The role of inflation due to the tremendous budget deficit, plus higher and yet higher taxes, and the crowding out of private capital investment, can easily distort conventional securities market projections.

A further securities market advance will depend on corporate earnings growth. That can be problematical with government spending and borrowing scavenging the private need for capital.

Stock Manipulation With Short Selling

When Bear Stearns collapsed in 2008, some said it was chiefly because of short sellers and not so much the firm's mortgage-backed securities holdings.

A short sale is when a trader borrows shares, which he sells in a plan to repay for less money. Share prices rise and fall as a firm's earnings move, but other influences move stock, including speculation about where the company is heading.

To Intentionally manipulate security prices is illegal. But Wall Street pros believe short-selling raids do occur. Two experts have described their theory of how such manipulation may have worked with Bear Stearns.

Wharton finance professor Itay Goldstein. and Alexander Guembel of the Saïd Business School and Lincoln College at the University of Oxford described the procedure in their paper entitled, "Manipulation and the Allocational Role of Prices."

Their finding claimed traders purposely drove the Bear Stearns stock price down and undermined the corporation’s reputation and health, and caused the share price to fall sharply. Goldstein and Guembel found that such intent works when the idea is to damage a firm; Ordinary traders do not have the same power.

Bear Stearns was finally sold out to the Chase Bank for a pittance, after corporate damage was accomplished by the poor market psychology of this short selling.

The short sellers reaped a bonanza.

John Maynard Keynes and the Democrat Party

The Democrat party in the United States has had an enduring love affair with John Maynard Keynes. Since Franklin Roosevelt and the New Deal, the economist’ s teachings have been their bible and guide.

But they do not always read Keynes correctly. Today’s Democrats merely refer to him to suit their political purposes.

They feel, for example, that you fight any recession by government spending money, pouring it into the economy to create jobs by encouraging demand.

Experience shows otherwise. Mass spending does not produce jobs. It does produce deficits, but no incentives for business to expand for hiring. Business expansion incentives mean lower tax rates, not higher rates that stifle business, especially small firms that account for the bulk of U.S. jobs.

The media ought to get into more depth when it espouses the thinking of John Maynard Keynes.

Is There a Widening Gap Between the Rich and Poor in the U.S.?

No doubt there is a difference between the rich and poor as a group when you look at the statistics. However, the folks within those numbers are not the same each time the statistics are computed.

Individuals move from one category to another within groups, while the computations are made. In other words, the poor people measured at one time, may not be the same people that are being counted in the following survey. They may no longer be poor.

Millions keep constantly moving from one income category to another. So you may have been in the poor bracket in the first measurement, but moved to a higher income bracket in the following survey.

This throws much of liberal policy reasoning into a loop, whenever they talk about handouts for the poor, or the need for a livable wage for the chronically poverty-stricken, or for those earning a minimum wage.

The Left goes on the assumption that earnings of those they measure in the lower categories are static. That the same folks are entrenched in constant financial mire.

The truth is, in the U.S. most are moving outward and upward.

The Value of Independent Research

A demand for independent securities research came about because of both real and imagined problems, regarding work of securities analysts.

One result: A 2003 settlement imposed by New York State Attorney General Eliot Spitzer to provide for independent stock evaluation. It forced major securities brokerages to spend $460 million in such research for its non-institutional clients.

The money was duly spent. There is doubt, however, about how much such securities research was used. Undoubtedly, a modicum of independence was achieved. But few investors made practical use of that source of information.

I guess it was a political success at the time the settlement was imposed. But that appears to have been the sum of it.

Vanishing Securities Analysts

In 2009, about one quarter of research departments in the securities industry announced they were dropping coverage of small=cap stocks, while about one sixth of them no longer covered the mid-cap stocks. A large percentage of large cap stocks are no longer reviewed because less analysts are employed.

This backs up my consistent contention that it does not pay for an investor to even attempt to evaluate securities in which to invest. Whether they are analyzed by Wall Street or not.

When you are on the outside looking in, it is extremely difficult to know what is going on in any business. Insiders in a corporation cannot know how outside events will affect their business either.

So why should investors bother to buy individual securities after a so-called analysis?

Their best bet is to buy baskets of securities, matched to indexes.

Should the Government Regulate Mutual Fund Fees?

Attempts are being made in a case that may even go to the Supreme Court, to supervise by government regulation, the fees charged by mutual funds for management.

The question often arises whether this may even be a regulatory matter. Investors ought to know enough to compare funds’ expenses and to choose to buy those with the lowest expense of operation. The funds give this information very clearly.

In fact, management of mutual funds often has little to do with success. Those funds which follow market indexes often perform better than managed funds. The overall success factor for choosing the right fund is low cost.

But that should not be the government’s function. Politics has a nasty habit of interfering with choice, and politicians are not the wisest advisers around.

Another Way to Help Banks

The Federal Deposit Insurance Corporation, or FDIC, which insures bank deposits, has been making it tougher for private investors to invest in weak banks and thus help solve our current financial problems. The FDIC has been forcing legal responsibility on bank bailout investors who can have no influence in the actual management of those banks. That acts as a deterrent for would-be investors.

Now, finally, arrangements are being made so that private capital sources, other than banks, can take over troubled banking institutions.

It’s about time to permit private sources to resolve banking problems instead of relying on the intervention of the government. The latter ploy has not worked despite the rationale that only such bailouts are the solution to get us out of financial meltdowns.

Government solutions come with a steep price. Permanent government meddling and unspeakable debt. Plus Inflation.

The Constant Assault on the Federal Reserve

There always has been some sentiment against the Federal Reserve. The very idea of having a quasi-government agency, the head of which is appointed by the president, an agency that is independent of congressional influence, is sometimes suspect. Congress in the past, especially when dominated by the Democrat party, has never been happy with the Fed.

The legitimacy of the 12 regional Fed banks has also been questioned. They are overseen by private-sector boards of directors, composed mainly of commercial bankers. That never sits well with the Left.

Independent-minded economists, however, have always come to the defense of the Federal Reserve. The idea has always been, at least in the past, to keep the Federal Reserve as free from politics as possible.

Despite the logic for the Fed’s practical presence, Congress always has wanted to impose some influence. It has to an extent. Since 1978 the Fed has had to enforce the Full Employment and Balanced Growth Act, otherwise known as Humphrey-Hawkins. And that conflicts with the Fed’s Number One stated currency/inflation activity.

That’s because the Humphrey-Hawkins Full Employment Act enforcement creates an inflating bias. Certainly not one of dollar stability. So there is always a conflict of interest. Incidentally, this is too often overlooked by financial media comment.

Congress would want the Government Accountability Office , their investigative arm, to audit Fed monetary policy. And the Obama administration constantly wants to add fresh responsibilities which are bound to sap the Fed’s objectivity and main focus.

Mutual Funds Not Behaving Well?

The question of what to do when a managed mutual fund is not behaving well has less to do with holding or selling on the merits of its management, but whether you should have anything to do with a managed fund.

I have always commented that indexed mutual funds or exchange traded funds (ETFs), are better alternatives. They usually outperform managed funds and are lower cost. The lower the cost, the more return the investor will get over the years.

This question also will come up when a managed mutual fund you may have gets merged into another. These mergers are usually done for either or both of two reasons. To get economy of scale. Or to hide losing records.

In most instances, index funds or exchange traded funds are always a better choice.

Why Not Buy Indexed Mutual Funds and Exchange Traded Funds (ETFs)?

Investors continue to buy managed mutual funds. Though most mutual fund managers rarely consistently beat the averages.

Another little known fact: Often, when some managers are actually doing better than indexes in the particular type of fund they are managing. they sometimes get nervous about the market. Then, they may play it safe and merely attempt to emulate the averages the rest of the year. Reason? They may be afraid to continue to defy the odds of being successful compared to indexes.

Besides, index mutual funds and ETFs are generally much cheaper than managed funds. Low cost is a most important investment factor you can rely upon for long-term results.

I have always suggested that index funds be bought instead of managed funds. Especially with the large mutual fund portfolios, all managers tend to find it very difficult to outperform indexes anyway.

That Bernard Madoff $65 Billion Number

When Bernard Madoff said he made off with $65 billion and was subsequently convicted of fraud, his case pointed out a problem that prevails in the financial media.

Investigators believe the sum involved is actually closer to about $12 Billion. You can see why the sensationalist media continues to pick up the larger number. It suits their purpose. (One wonders why Mr. Madoff chose to use this figure).

What bothers me is why some in the financial media, who ought to know better, continue to use the $65 Billion, apparently inflated figure.

Ignorant or lazy?

Solve The Credit Rating Problem

One way to solve the credit rating problem is to allow competition among those offering such services.. Allow any company who feels qualified to register as a ratings analyst. Today, a small handful has a monopoly.

If a company can show the Securities and Exchange Commission that the firm has qualified analysts a and capability to evaluate bonds and other securities, then why not have the SEC license them?

Another problem will have to be resolved: Do credit rating companies have First Amendment free speech immunity? A ruling currently going through the courts has said they possibly could be sued for errors of judgment.

That could actually impair all security analysis with its future implications.

Free Market Adherents in the Media

Very few reporters and editors in the general media have free market views pertaining to common questions about schools, transportation, highways, and certainly financial subjects.

Certainly not if they have been trained conventionally in journalism schools.

There, in addition to what generalities journalists are taught, they receive a modicum of economic and financial training. And little, if any, from free market economists. As examples, economists such as Friedrich Hayek, Milton Friedman, Thomas Sowell, and Walter Williams, among others.

No wonder you get left-leaning slants, even in many financial articles.

The Proposed Consumer Financial Protection Agency

The Obama administration Intends to set regulations on human nature. The way bureaucrats feel human beings look at odds, for example. Sometimes illogically, but nevertheless, what bureaucrats feel are in the public’s true interests.

That stand may make sense to a bureaucrat. But in my observations, it may not make sense to individuals that make up the public. Folks make dumb financial errors all the time. Correcting them by fiat can be foolish by just regulation alone.

I feel all that ought to be done is to educate. The subject is too complicated for bureaucrats because no one set of financial rules can accommodate every individual’s situation.

Once the government gets into the act, they attempt simplification. And that cannot be done, apart from insisting on the use of easy-to-read information.

To create something for the masses, the bureaucrats dumb down the process where they hurt the outcome for too many individuals.

The Credit-Default Swaps Market

Credit-default swaps got a bad name during the recent financial meltdown. But they are still being used, to the tune of about $26 trillion, despite the rhetoric in the media about how bad they were and their use by “greedy” bankers. Also, the major marketplace, called Markit Group Holdings Ltd., is owned by a group of banks. And this gets some criticism.

The real problem with credit-default swaps is that the market for the swaps index based on their data may not have been entirely accurate and thus perceptions of value may have been off during the financial meltdown.

All market-determining values being watched may not be trustworthy. Ironically, it seems credit-default swaps may have been even more accurate than many other major financial statistics we now rely on.

Global Results of Unlimited Government Spending

Most Americans, particularly those who pride themselves on being educated simply because they have a college degree, should think seriously. This is very important.

They are being hoodwinked or lulled at best by politicians who tell them that government “experts” know all about spending and deficit control. Any politician or bureaucrat with a short-term horizon that consists of his or her term in office is never reliable on this score.

Especially politicians unfriendly to, or unfamiliar with an understanding of capitalism.

Our tremendous deficit will spell enormous inflation. Or a loss of currency value. Not very soon, but eventually.

And the loss of the eminence of America. As an economic and, therefore, a political as well as military entity.

The loss of the dollar as a reserve international currency is now underway. The ability to protect U.S. global interests in the future will be diminished in this process.

Do not treat unlimited government spending lightly. The repercussions can be extremely serious in matters of our economic and national security.

Remember: We always contend with other nations who may spend more wisely than we do.

Tax Financial Transactions?

Liberal politicians and powerful unions controlling them are seeking to tax frequent financial transactions, and thus discourage what they call “excess speculation.” The estimated tax revenue this would bring to the U.S. government is about $190 billion over six years. Liberal legislators view such taxes as a bonanza.

A similar move is afoot in Britain and Europe amidst their left-thinking politicos.

This tax and its dire consequences on the economies of countries involved. on their trading transactions won’t be the only problem. Yes, securities trading is integral to economic facility.The tax would be indirectly felt, in time, by everyone.

But so-called speculation will be penalized whenever and whatever politicians do not favor at any time. That opens a Pandora’s Box of political terror, reflective of a typical fascist-type government.

All this hides the fact that speculation in a capitalistic society does not cause pricing problems. It merely reflects pricing, something politicians of the left will never comprehend. It may appear to help boost rising prices but works the other way around just as easily, when prices fall.

The anti-capitalists, however, only notice when prices go up, not down.

Liberal Financial Thinking and Unintended Consequences

I learned a long time ago that here are basic thoughts and ideas that make someone a political liberal.

They may be ingrained in liberal minds and no further education about practical education will dissuade that thinking. Sometimes they may be merely a political device for getting populist votes when running for office or organizing workers on behalf of unions.

In either case, experience and common sense has always proven that these liberal financial thinkers have always been wrong. Their actions have unintended consequences that are damaging long term, even to their own interests or constituents.

It may not be profitable for these folks to pursue the truth. Or they may just be dumb.

Government Dollar Spending Does Not Produce Economic Growth

Learn the difference between a dollar “invested” by government and a dollar invested by private industry.

Those who believe in state control would leave you to believe that it is the same, if not better, if government makes the decision to spend, or as the Obama administration says, “invest.” As opposed to private enterprise investments.

In one case, the allocation is made by political decision which often is subject to pressures which have nothing to do with supply and demand. Rationing and corruption follow. The other is more likely to conform to what the public wants.

Moreover, private industry investment has a multiplier factor that government spending does not.

Too many government jobs have no multiplier effect on the economy. Their purpose may be different. Often it primary has political, social and environmental intention.

Governments don’t innovate and create new companies and multiples of jobs. Nor do they enervate optimistic psychology of a booming economy. You don’t have to be a rocket scientist to appreciate this. Yet, that psychological effect is most important.

Remember: Socialist countries have never successfully been satisfactory consumer societies

What Many Investment Bankers Do When Fired

Many who have been on Wall Street for years, have shown their true colors when fired. It seems they were not really interested in finance. They have wound up doing work totally outside finance.

They have become chefs, gardeners, nutritionists, any thing but financial experts.

You would think they knew enough about finance to have it in their blood, to do something in the field. To write or talk or teach about the subject of investments. Stick to finance in some way.

But seemingly they never did. It was a job that paid more than it ought to. Better at the time than being at another mundane position.

And it showed in their past efforts.

Be Careful When a Government Honcho Hollers “Bailout”

Bailouts have all appeared to have been failures when you look back at them. So why do we still keep hearing of them as solutions?

The financial disaster was going to be bailed out, for example, by a whole assortment of actions:

One: The takeover of banks.

Two: The takeover of Fannae Mae and Freddie Mac.

Three: The Takeover of American International; Group (AIG).

Four: The Troubled Asset relief Program (TARP) to buy bad mortgages from banks.

Five: The Public-Private Investment Program to buy the same troubled assets.

Six: The takeover of GM and Chrysler.

Though we had perfectly good car companies operating elsewhere in the U.S. to pick up business and relocated jobs, we had to bail General Motors and Chrysler. That helped their powerful union but did little else for the economy. Ford and others in the industry operating in the U.S. have been able to do so without that crutch

At the same time we pumped out money like water going into the ocean. Federal Reserve funds are being priced down to practically nothing in the banking system.

All this outlay of funds cost trillions upon trillions. That must be repaid with taxes and cheaper-valued dollars to come in our future, and that of our grand kids and their offspring.

And with little success to show for all that, compared to what would have happened if the politicians and “experts” sat on their hands.

The Worst Recession since the 1930s?

Politicians love to bandy about their estimates of past recessions. It comes in handy when they are running for office and they need to paint a suitable bleak economic picture for which the present officeholder bears responsibility.

In the year 2000, with unemployment about 4.0%, we were being told by Democrats out of office, that we had the worst depression since the 1930s. We actually were in the midst of a boom economy.

What about the mid 1970s when President Reagan took over. We were experiencing a severe downturn that can be considered worse than what we have today. The fall in GDP was 4.9%. Compared to a drop of 18.2% in 1937-38. That truly was the worst economic cycle since the 1930s.

What we can therefore correctly say is that today’s is the worst recession since 1973-75.

Who Can Stop a Financial Bubble?

I have recently commented on systemic risk and the role of the Federal Reserve. Many commentators have done so, particularly with regard to potential bubbles.

In my past studies in both graduate school and on the job as a market analyst and as an observer and businessman, I have intimately seen how bubbles originate and then caused their damage.

I would like to make a suggestion about bubbles. No other commentator I know of has mentioned what I am recommending.

Bubbles usually are not stopped by Federal Reserve action on interest rates, as is usually suggested by the pundits. That is because politics always take over, and often preclude any dampening of interest rates by the Fed.

Not in a manner that can have an effect on any bubble. It would, for example, have had done absolutely nothing, as with the internet bubble. Or even with the mortgage bubble because interest rate adjustments then would have been applied too late. The Fed’s miscues were too early for a bubble to have been recognized.

On the other hand, action or inaction of the Securities and Exchange Commission would have done the trick. Sitting on obviously useless and dangerous underwritings instead of open-handed approvals of questionable underwritings created the internet bubble. The Fed had little to do with that.

By merely slowing down the underwriting of questionable underwriting, the SEC would have dampened many such past bubbles.