Monday, February 27, 2012

"Grandchildren Do Have Value"

Jeremy Grantham's quarterly investment letter:


"Capitalism has gone through a Darwinistic series of trails and errors, which still continues. For the time being, capitalism has tuned itself to rapid growth at almost any cost. Circumstances such as the hydrocarbon revolution and the ensuing population explosion have allowed for both high growth and high profit margins to sustain the growth. Sustained high margins have in turn trained capitalists--or corporate executives if you prefer--to set high hurdles for all investments....

"Of all the technical weakness in capitalism, though, probably the most immediately dangerous is its absolute inability to process the finiteness of resources and the mathematical impossibility of maintaining rapid growth in physical output. You can have steady increases in the quality of goods and services and, I hope, the quality of life, but you can't have sustainable growth in physical output. You can have 'growth'--for now--or you can have 'sustainable' forever, but not both. This is a message brought to you by the laws of compound interest and the laws of nature."

Complete commentary here.

Sunday, February 26, 2012

Quote for the Week, Feb. 26-Mar. 3, 2012

The world owes all its onward impulses to men ill at ease. The happy man inevitably confines himself within ancient limits.
--Nathaniel Hawthorne

Monday, February 20, 2012

"The Bubble Is Everywhere"

Bob "The Bear" Janjuah

Forget the Blob. Worry instead about the Bubble. In his latest analysis, Bob Janjuah of Nomura International gives his view from the Bear Cave:


"Greece (and the whole eurozone story) continues to lurch about, seemingly perpetually, from Farce to Tragedy. Policy seems to be focused on protecting and preserving vested interests, with little consideration given to the dreadful conditions the people of Greece and other "peripherals" are being forced to live with....

"I am staggered at how easily the concepts of Democracy and the Rule of Law – two of the pillars of the modern world – have been brushed aside in the interests of political expediency. This is not just a eurozone phenomenon but of course the removal of elected governments and the instalment of "insider"technocrats who simply serve the interests of the elite has become a specialisation in Europe. Many will think this kind of development is not a big deal and is instead may be what is needed. Personally I am absolutely certain that the kind of totalitarianism being pushed on us by our leaders will – if allowed to persist and fester – end with consequences which are way beyond anything the printing presses of our central banks could ever hope to contain....

"[I]n this current cycle, where central bank balance sheets are at the core, the bubble is everywhere – in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices – you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market.

More here.

Sunday, February 19, 2012

The Pink Lady and The Trickster

Helen Gahagan Douglas vs. Richard Milhous Nixon
for U.S. Senator from California

She was, all by herself,
"10 of the 12 most beautiful women in the world."
And wicked smart to boot.
Sarah Palin, returning from Oz with both heart and brains,
might come close.
JFK: "the biggest damnfool mistake I ever made."

What if?

Don't worry about people stealing an idea. If it's original, you will have to ram it down their throats.
--Howard Aiken

Monday, February 13, 2012

Back to the Past

Sawin gives the bad news.

Maine's Finance Commissioner Sawin Millet has always been a fiscal conservative. So it came as a bit of a surprise that in November he tolerated upward revisions to revenue projections coming from the Legislature's Revenue Forecast Committee. That committee, it turns out, may have been overly optimistic about how the rest of the State's fiscal year, ending June 30, will turn out.

Millett now reports that revenues in January lagged projections by almost $40 million, a huge miss. $15 million of the shortfall was due to higher-than-normal income-tax refunds, meaning that filers ended up making a lot less in 2011 than they had the year before. We know also that federal payroll withholdings took a nose-dive in mid-January. Further evidence of an economic slowdown comes from the chart below, showing deliveries of gasoline to retailers. Can you say Cliff Drop?

The fall-off in gas sales is consistent with Sawin's observation that sales-tax revenues are softening in Maine. It may be time to crank those revenue projections back to pre-November levels.

[update, February 14--]
The State of Maine is getting sued over alterations made earlier this year by the Legislature to benefit plans for state retirees. If the plaintiffs prevail--and their defined-benefit retirement plans are kept intact by the courts--the State will be in a world of hurt. Poor returns in the MainePERS investment portfolio over the past five years, with more of the same likely over the next five years, mean that the General Fund will have to cover the shortfall.

[update, February 23--]
Speaking of shortfall, Commissioner Millett is now penciling in a $14 million shortfall in the state budget for this fiscal year. Notice I said pencil. Revenue forecasters will be surprised at the blow-up just around the corner. Interestingly, $5.7 million from the recently announced 49-state mortgage settlement with the biggest banks on Wall Street will get thrown into the $14-million hole like so much silly putty. That money was supposed to go for relief to distressed home borrowers. The settlement, by the way, still awaits court approval. Knowing Sawin, I'll bet he has a big fat eraser on the end of his pencil.

Sunday, February 12, 2012

Quote for the Week, Feb. 12-18, 2012

Too often we... enjoy the comfort of opinion without the discomfort of thought.
--John F. Kennedy, U.S. President [1961-63]

Sunday, February 5, 2012

Happy Days Are NOT Here Again

The employment gap persists.

Employment figures released on Friday by the Bureau of Labor Statistics seemed, on the surface, to indicate that the U.S. economy is on the mend. On cue, the stock market rallied. But the January numbers are always difficult to interpret. For starters, the "seasonal adjustment" used by bureaucrats to "smooth" the trend is far bigger in January than any other month of the year:

The reason? Temporary jobs added in the retail sector during the prior three months (the annual bump for holiday shopping) all go away in January. On an unadjusted basis, we actually lost almost 2.7 million jobs in January. But the BLS estimated that the "normal" seasonal decline should have exceeded 2.9 million. So after seasoning and stirring, presto!--the cooked number was +243K. Rally on!

As John Hussman observes wryly in his weekly commentary, "the enthusiasm over that number is almost certainly excessive." Further complicating the January report is an annual "benchmark" adjustment applied to each of the twelve monthly numbers from the prior year. Finally, we know that the January 2012 figure itself will undergo multiple revisions, ending with next year's annual benchmark adjustment. As Yogi Berra might have said, it ain't final till it's final.

So let's take a step back from the January mess and look at some longer-term trends. From January 2011 to January 2012, the U.S. economy added about 2.3 million jobs, but this still leaves us about 7 million shy of the cycle peak four years ago:

As former U.S. Labor Secretary Robert Reich points out in his blog, the working-age population has increased by 10 million since January 2008. So job creation is not keeping up with population growth (NILF stands for Not In Labor Force):

What's more, of the 2.3 million jobs added during the past year, only 1.5 million were full-time jobs (see Table A-9 here). Total real disposable income has stagnated...

...meaning that the same-sized pie is being shared by more people, leaving smaller pieces for each. Further evidence of the economy's flat-lining is the recent downturn in payroll withholdings:

Bottom line: January's phantom surge in employment must be followed by real increases in the months ahead before we can get too excited.

Quote for the Week, Feb. 5-11, 2012

That men do not learn very much from the lessons of history is the most important of all the lessons of history.
--Aldous Huxley

Wednesday, February 1, 2012

Going Back To Where We Came From

PIMCO's Bill Gross nails it.


"A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets--bonds, stocks, real estate and commodities alike--is now delevering because of excessive 'risk' and the 'price' of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time."

Complete commentary here.