“When the horizon widens, there is a future out there to live in…”

An improving jobs picture and rising stock market are helping us feel more comfortable spending money. Stronger spending hopefully will jump-start a virtuous circle for recovery. Spending fuels hiring, which fuels spending, which fuels hiring. Businesses then need to add inventory, and the economy grows. Consumer spending, which fuels 2/3 of America’s economic activity, has begun to reach a broader array of businesses. Restaurants are among those seeing sales increase. The warmer weather has been pulling people outside, and when we go out, we spend. We shop.

Is the economy at last achieving what Ben Bernanke once called escape velocity? Is private sector growth strong enough that the economy no longer needs repeated boosts from fiscal and monetary stimulus? Incoming economic data can be misleading until they are revised in the future to clarify which data are giving false signals. Most recent news about the jobs market and pace of industrial production has been strong, favorable. Good news begets better business and consumer confidence, which can spur more spending, and borrowing.

The forecast for GDP growth, which is the broadest measure of total spending and production in the economy, is expected to be a mediocre 2%. This pace may be too slow to bring down the unemployment rate much, casting doubt that recent declines can persist.

There are storm clouds:

• If the recession deepens in Europe, and growth slows in the rest of the world, it will hurt US exports. For the moment, bad vibes from the Old World are in remission.
• Tax increases loom at year’s end unless Congress and the President compromise on deficit reduction.
• A continuing confrontation with Iran will keep oil and gas prices high, and depress/restrict growth.

The stock market is a leading indicator. It is gaining traction. However, there is still little retail participation. There is a heap of ambiguity in so much stuff disseminated by government and trade organizations. Frequently, there is disparity between headline and real story. The pressing impulse for most of us to plunge into the market is bridled by doubt. The suspicion stems from the fact that investors have been fooled time and again in this economy’s slow journey up from the depths of crisis. Mortgage rates may begin to rise above 4% before too long. The Fed has noted a mild improvement in the economy, and it must keep an eagle eye on inflation. If the Fed’s rate remains lax too long, inflation erupts, and if it tightens too soon, we contract deflation fears. This we especially do not need. I think the Fed will be reluctant to tighten, and will err on their side of caution. A little inflation is not a bad thing.

Let’s throw some more stuff around:

• The Eurozone continues to grant loans to hopelessly indebted nations in return for austerity programs that are not well received.
• Greece seemingly manages to survive to warrant another bailout as lien holders and creditors blink despite its shrinking GDP.
• Markets breathe a sigh of relief. The lack of belief in this rally fuels further gains, as the market climbs the ‘wall of worry’. It is difficult to see a bubble, however, with such low retail participation.
• Monetary policy from nearly every single Central Bank is aggressively easing (Fed, ECB, B of E, B of J) or in the process of easing (People’s Bank of China).
• Geopolitical concerns of a possible Iran / Israel conflict, and crude oil rises to $108/barrel. The toughest thing to forecast is oil. Whenever there is a threat of a shortage, or a conflict, the price escalates. It has a dampening effect on the economy in the best of times, and especially so at a weaker time. Iran can control the spigot to our economy. They can tighten it up a little bit, they can loosen it up a little bit, they can slow us down a bit. Or, make us worry about slowing down. I’m not sure which is worse. They both seem to have the same effect. The big caveat darkening the sky is the threat of a military clash between Iran and Israel.
• For the third month in a row, more than 200K jobs were added to the workforce. The unemployment rate held at 8.3%, as additions were offset by a rise in the numbers of jobless when some who had given up jumped back into the ‘pool’.
• There is a persistent uncertainty regarding financial reform. Absent legislative action, taxes will increase substantively in 2013. Dividends may be taxed as ordinary income up as high as 39.6%, versus the current 15%. Capital gains may be 20% (maybe more). Currently, it’s 15%.
• There are headlines, and there is reality. Notwithstanding all the Santorum / Gingrich chatter, Mitt Romney will occupy the winner’s circle when the primaries end June 26. The rising price of oil is fuel for his campaign. We desperately need to reduce our dependency on foreign oil. We need to explore how best to utilize the natural resource our country has been blessed with: natural gas. Romney needs fuel. The conservative faction of his own party is still trying to bludgeon him.
• The current Malthusian fear that the world is depleting its stock of raw materials (think oil, copper, gold, water). Fears based on the rising consumption trends of developing nations such as China and India. We are all hungry for energy, food, water.

Welcome to the jungle.

What we all want is our best options left open as long as possible. We want not to have taken any mis-turns, but also not to have misread the correct turn. I often have this nagging suspicion that no matter what I am doing I might better be doing something else – filling my head with ‘oughts’. Opportunity is a matter of luck; it takes a long time to understand that acting upon it is a matter of wisdom. You are always in equal danger of falling off either side of the tightrope. It’s best to trust yourself. Keep marching along your own course without letting anyone dissuade you.

‘Ad hoc, ad loc, and quid pro quo. So little time, so much to know’.

This, a quote from the infamous, Jeremy Hilary Boob, Ph.D., aka “The Nowhere Man” hailing from the ‘Sea of Nothing’ in the Beatles’ film “Yellow Submarine.” He knows so much, yet has learned so little. I will consider myself most fortunate to have learned just a few things along the way, as I’m humbled by how little I know. I am often not sure what I mean, but I have found that if you let your mouth go in a nurturing environment, you will say things that you didn’t know yet. And you begin to understand yourself. Everything we say is connected, and that’s the pleasure of a great conversation — the way it stretches or expands until it explodes in revelation. Trusting yourself is the wisdom portion. You are on your own, just like everyone else.

In the depth of a financial crisis, people live day to day, week to week, month to month, cradle to grave. At the height of a bull market, people are happy to look out five years, make plans, buy big-ticket items. A second car, a bigger car, a bigger home, a second home. And remember, the best time to buy real estate is not when everyone else is. Spring is near; shoots are sprouting as we show signs of strength. Let’s go with this.

Til then,
Ray Mott

“If you are rich and unhappy, it’s your own damn fault…”

An American consensus for the common good is in trouble right now. Politics is organized around conflict, and drawing sharp distinctions. Robert Kraft (Patriots owner) made this observation about Congressional political gridlock. “They have the blue team, and the red team, yet we are missing the red, white and blue team. The USA”. That’s us. I believed I fired this Congress months ago. If I am in a room to negotiate, the deal won’t get done if someone leaves the room. Big talk from the likes of me. I began my life rather lackluster as a door to door aluminum siding salesman with a trunkful of samples in Bridgeport, Connecticut. Perhaps best left unsaid.

In 2009, any responsible President’s priority would have been, should have been, stabilization of the financial system. Obama was looking at a financial collapse, and a mortgage collapse. He was elected as a pragmatic, unifying reformist who appeared to be, and would become, more responsible than Bush. He did not ignore Bin Laden, but set a course to find him. He did. Bin Laden was captured and killed, yet according to “The Donald” anybody could have, and would have, done the same thing. A depression was averted, the bailout of the auto industry was amazingly successful, and the Iraq war was ended with no troops left behind. He has done some stuff.

Now, with the clarity and ‘prescience of hindsight’ (this is where even I can look good), his critics are highlighting chinks in his armor. Unemployment remains stubbornly high, and no President has been re-elected with > 8%. The national debt continues to rise unabated. Obama rejected a Canadian company’s plan to build a $7 Billion oil pipeline across the United States. Estimates of 20,000 new jobs were at stake, yet Obama wants more reviews on its environmental impact. His critics salivate at this sound bite.  A Hobson’s choice for a man conflicted.

For 30 years, the Fed lowered interest rates with the hope that credit markets and risk assets would expand proportionally. It worked. Then, someone siphoned one drop too many into the beaker, and the mixture turned cloudy. Stoichiometry’s law of definite proportions didn’t approve of the quantitative relationship of the reactants. When you get down to zero interest rates, the world changes from Newton to Einstein, with regard to the physics of money. How many of you aced ‘physics’ in college? I thought so. When money yields nothing, banks won’t lend it. The combination of low return and high duration risk freezes the system.

The economy is improving (so I read). However, opponents bark that we are not going where we want to be quickly enough. We have come to believe in the emerging market story. China, India, Brazil, Turkey… sprouting a middle class, and filling the growing divide between the very poor and the very rich. Interesting. You are not considered very rich here in the U.S. until you have at least $10 Million of liquid assets (no real estate, please). The middle class here is vast. So populated, we have a lower, middle and upper-middle class. The middle class is the most productive, and they buy lotsa stuff. They want to make it to the top, and many do.  Many have become “almost rich”. The emerging nations are where we were 50 years ago. Many remember our parents humble beginnings (here is where I am amused by what some of my generation deem as humble). The richest person in town may even have been a millionaire. Many of the children of this generation became millionaires, their parents in awe with pride. This burgeoning growth throughout the world will help us grow our way back.

Euroland, like all families, is dysfunctional. The parental, frugal north, and the spoiled children of the south. There is a marked difference in their competitiveness. The longer you support less competitive countries by lending money to them, the longer the crisis will drag on, and losses will increase. Wages and prices in the south need to deflate. If you can devalue your currency, then you recover, and can see the sun rise again. On the Euro, these nations are uncompetitive. Tough, tough choices need to be made. If they keep subsidizing the noncompetitive countries, they crowd out the good banks and the good guys in the private sector. They will finish the day with more government and less efficiency. From a structural point of view, Europe won’t be able to compete.

Christine Lagarde, managing director of the International Monetary Fund (IMF), and former French Finance Minister, is noted for her ability to listen, assess, pull together a team, and get the best out of a tough situation. An IMF staff member remarked that you don’t leave the room until a decision has been reached. That is music to my ears. Leaders are created by the crisis of the times. Her management style is inclusive. A consensus is formed, which prevents a waste of future time convincing people to implement the plan. She opened her eyes to the magnitude of the problem, and warned that banks did not have enough capital reserves to withstand the crisis. Her style has built confidence in her leadership, and has recently mollified market jitters, for now.

Ron Paul, Newt Gingrich, and Rick Santorum are all serving as effective foils for Mitt Romney. Each takes positions troubling to independents, who ultimately decide elections now. Gingrich’s rhetoric may win an occasional primary, but come on; he appears to me to be a name- calling, bickering, grid-lock poster boy. The hard right’s controlling interest in the Republican Party, and its desperate refusal to embrace someone close to the middle is, for me, a troubling augur of a future of more congressional gridlock.  The ideologue’s mantra: ”I’ve made up my mind – don’t confuse me with facts”.

The debate of January 23. Romney goes after Newt for his lucrative consulting fee for Freddie Mac, influence peddling, and his controversial tenure as Speaker of the House. Gingrich was reluctant to spar. Yet, isn’t that the purpose of a debate? You are exposed to your past record of who you are. Let’s see you, hear you, think on your feet. I’m sorry Newt, this job you want, demands a lot. Newt fed at the public trough all his life. He has no “real world” experience. The Republican Party melts down, and guess who’s back? It’s the return of Newton Leroy Gingrich.  He has channeled the anger of the Tea Party movement. After being set adrift by mutinous House Republicans in 1998 with a reprimand from the House Ethics Committee, he has a huge bug up his posterior. His talks are animated with sound bites of “food stamp recipients”, “elitists in Washington”, and liberals like George Soros, to incite a channeling of frustrations. For me, he is a model of insincere rhetoric.  According to Newt, Obama is doing the polar opposite of what he should be doing. Clever, only by suggesting that everything would be perfect by now if he were in charge. Newt describes himself as a visionary. When pandering shamelessly to the ‘Space Coast’ crowd during the Florida primary, he unveiled plans to create a mammoth new space program including a colony on the moon within the next nine years.  Huh?! Gingrich’s rallying cry is an end to big government programs. The estimated cost of establishing such an endeavor ranges between several hundred billion to one trillion.  Who pays for this? What precisely do we need, want, or do with a colony on the moon? Is he imagining populating the moon, or actually solving real problems here on earth. On second thought, I can open an office there. For the adventure seekers, on a quest for a sense of proportion, I have a nice crater-front with a panoramic, distant view of the world. The quintessential, quintessential getaway. After all, we are Properties Unlimited.

Housing continues to need a jump-start. It has been mentioned in the past, and it’s mentioned commonly now. For those who are current in their mortgages, make it easier for them to finance to current lower rates. Give them a break. They are honoring their commitment; please keep them in their homes. Stop the bank owned / foreclosure sales. Housing and autos will lead us out of a recession. Make the bottom firmer, and cut any pent-up inventory gathering on the horizon.

It is the beginning of wisdom when you recognize that the best you can do is to choose which rules you want to live by, and it is persistent and aggravated imbecility to pretend you can live without any. We desperately need broad-based, wholesale, tax, entitlement, and regulatory reform. There is so much work to be done, yet we are trapped in this petty political arena of divisive finger pointing, and name calling ‘no man’s land’. As I recall, we have been through a lot in the past couple of years. We have learned a thing or two. If members of our esteemed Congress are smart (and only smart people should be elected to office), then try to do the right thing. Something. We need to make changes to the way we have become. We need to make reasoned choices. Again, I say, we need to grow a new philosophy. Here is where you might start. Act as if you were paid to achieve, as most people are in the real world. Have an actual conversation, make adjustments, and move on.  A mind is a terrible thing to waste.  Freidrich Nietzsche, perhaps the father of Existentialism, made this observation that seems apposite of this moment. It should be inscribed over the entry to the House and Senate Chambers. I paraphrase, ‘There is something in every man that is inaccessible to revision. That something can be taught nothing.’

Perhaps even better… a person who has skills can be taught. A person who has no honor has nothing.

Til then,
Ray Mott