Staying Out of the Ditches

The far right and far left political philosophies are like the ditches alongside the destination-bound lanes of an Interstate Highway, the extremes that represent failure and disaster with lots of room between them for relatively save travel. 

Pre-1920 America with its unfettered competition, rampant economic growth, small population, small government, and unlimited opportunity was the far-right ideal.  It worked well when resources and land were abundant relative to the population and families could work together and make a living with forty acres and a mule.  If things weren’t working out, they could always pull up stakes and go west.  Some far right folks dream of those days, but we can’t go back. 

Cuba with its uniformly shared poverty, empty store shelves, abundant spare time, and absence of freedom, even to leave, is a good example of the far left.  People can be born, live their lives, and die under such conditions, but they can't live up to their human potential.  Such a far left environment never works except for politicians and government employees who hold all the power in such systems.

Fiscal responsibility is a different issue entirely.   Whether intrusive and left leaning or minimalist and right leaning, a government can match income and spending and avoid driving the nation into bankruptcy.   Well, at least it can unless leadership is weak and controlled by contributors, constituents, and special interests and primarily focused on raising campaign funds and being re-elected. 

Over the past fifty years our leaders, liberal, centrist, and conservative, giving in to the demands of “We the People,” have gradually spent us into bankruptcy.  We have increased spending of borrowed funds to the point that Treasury Secretary Geithner can, in a plea for an increased debt limit, declare with a straight face, "Just remember, this is the United States of America. We write 80 million checks a month. There are millions and millions of Americans that depend on those checks coming on time."   (By the way, our total population was only 80 million in 1903 when we had that small government freedom.)

Very few individuals claim to advocate either far left or far right political philosophies.  I doubt if either group would exceed 5% of the population.  The problem is that uninformed and inexperienced leadership and irresponsible management of our national resources tend to create panic and irrational behavior and inspire a search for a savior, not The Savior, but a savior.  And that is the kind of situation that can allow a charismatic leader from one of the extremes to seize power.   The easiest way to end up in one of those ditches along the road is to bankrupt the nation, devalue the currency, and clear the way for a Hitler to drive us into the right ditch or a Chavez to lead us into the left ditch.

Let’s try looking, not for a savior for president, but for somebody with a long history and proven track record of selfless public service and executive experience.  Let’s get rid of career politicians in congress and elect statesmen, already successful in various fields and dedicated to the success of the United States of America.  Our president and senators and representatives are supposed to work together for the benefit of the nation.  And whoever those leaders are, the only thing “We the People” owe them is rational skepticism and tough questions.  Let’s save the worship for after they are long since dead and we have had time to evaluate the results of what they did.  Hopefully we will not have run into one of the ditches and lost the freedom to do so.

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Apple and Peter Lynch Big Winners, But Not I

I have done a couple of postings on Kodak and its problems, but, for an incredibly positive corporate  performance, take a look at Apple (AAPL).  I am going to 'fess up and provide convincing evidence that I am a foolish investor and, for that reason, do not offer advice on individual investments.  Well, that and the fact that I'm not a licensed investment adviser.

Over the last 12 years I have invested almost $4000 in Apple.  Unfortunately, I did not buy their shares but rather spent the whole sum on their fantastic products. I did read Peter Lynch's investing advice about "buying what you know" and "sticking with winners."  I just didn't follow it.

Just out of curiosity I checked to see what the results would have been if I had matched my Apple product purchases with stock purchases at the same time.  The $3,925 I spent would now be worth $22,391.  On the upside, with the possible exception of the first iMac which I don't own now, all the products still work fine, even the antique iPod with the little hard drive in it.

Am I buying Apple now?  No, it always looked expensive and it still looks expensive.  Oh well, surely some mutual funds I have held had Apple stock in their holdings.

And, I did buy a Dell computer, still working fine, June 16, 2003, for about $2,500 when the Dell share price was $32.  Eight years later Dell is $17 a share.  That stock market is a fickle and dangerous place...unless you follow Peter Lynch's advice.

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Boost Retirement Income with Kodak Bonds? (A Lesson for the USA)

I joined Eastman Kodak in September 1965 and was a Kodak employee until January 1993 when the chemicals business was spun off as a separate and independent entity with a NYSE listing, Eastman Chemical Company (EMN).  Kodak had been founded in 1880 by George Eastman, inventor and businessman extraordinaire, friend of inventor Thomas Edison and contemporary of “Robber Barons” Carnegie, Mellon, and Rockefeller.  Eastman was the Bill Gates or Steve Jobs of his time.  He developed a powerful technology and a paternalistic corporate structure that, together, dominated the imaging business for a hundred years.

By 1965 the glory days of Kodak were over, though momentum carried the company through the 1970’s.  I did an earlier posting on the fall of Kodak and its performance compared with EMN after the split.  But now the plunge continues, and there is new news.  Here is an update on the stock price chart, 1965 through yesterday. 

It is not just the share price that is suffering.  Kodak is having cash problems resulting in decreasing bond values and climbing bond interest rates.  In Kodak’s Bonds Fading Fast, WSJ today, Matt Wirz and Dana Mattioli report that Kodak bonds due in 2013 are now available at prices that result in a yield to maturity of more than 16%.  So, with 10 Yr Treasury’s at around 3%, why not load up on some Kodak bonds to improve your retirement income?  Because they are risky and, without some good luck, the company could default.

The competition, digital photography combined with the proliferation of digital images, killed Kodak.  We don't have to suffer with Kodak unless we are recently retired from there or are one of the remaining employees or have gambled on their stock or bonds.  But national economies face competition as well, and if the United States does not get its financial house in order and improve its attitude and get back to work, it will follow the same path as Kodak. If that happens, we will be able to get very high yields on Treasury Bonds, but the interest won't buy much.  And all US citizens will suffer the effects.  

Congressional Beliefs and Prerogatives

"In 1997, Congress incorrectly believed that the country would face a surplus of doctors so it set this limit (16,000 per year) by capping how many resident positions Medicare would pay for."

Does that statement sound as ridiculous to you as it does to me?  It is from a WSJ Op-Ed by Dr. Herbert Pardes, President and CEO of NY-Presbyterian Hospital and Dr. Edward D. Miller, dean and CEO of Johns Hopkins Medicine.  The headline is, "We Can't Afford to Train Fewer Doctors," and the doctors are making a pitch that Congress must increase the number of doctors hospitals can train and not reduce funding provided for that purpose by Medicare.  You may want to read the Op-Ed because it has some interesting statistics on the numbers of doctors we have and their advanced ages and the numbers we are likely to need.  The authors believe that we need to train 22,000 to 24,000 per year rather than 16,000.  They don't say what Congress "believes" now.

I don't know if the doctors know what "Congress believed" in 1997 and I doubt if Congress knows what it believed.  What I believe, is that Congress has no reasonable basis for predicting the numbers of doctors needed to meet the spiraling increase in demand for health care driven primarily by Congress and has no business trying to fund or meddle in that market.

Here is the way it is supposed to work.  If there are too few doctors, demand for them and compensation of them will increase and that will attract more capable people to study medicine.  If there is a surplus, some will find themselves with time on their hands, compensation will decrease, and capable people will choose rocket science or research or some other intellectually challenging vocation.  Some physicians may become writers or run for Congress.  If it is costing medical schools and hospitals too much to train doctors, they have to improve their processes and reduce the cost.  It does not work, in any industry, for the government to try to predict demand and limit or subsidize the supply to try to match the two.  It just doesn't work.  Not the least important reason it doesn't work is that the government changes every two years, providing little or no continuity.

And Medicare is supposed to be health care insurance, not physician training.  No wonder it is broke! So, Doctors Pardes and Miller, go back to work and figure out  how to cut the cost of medical education.  A goal of a 50% reduction would be a good place to start, and that would more than offset the loss of Medicare funding which you say now covers about a third of the cost.  You may have to outsource it to India if you can't do it here.  Because right now you are part of a very long line of people demanding more, more, more from the federal government.  And it isn't going to happen, I hope.

But there is this concern also:  I'm afraid we are getting close to having a majority of US citizens believing that the quote at the beginning of this post sounds quite reasonable and that it is the business of Congress to develop beliefs about how many doctors we need and fund their training.  And if that trend continues and expands into other professions, Congress had best pay attention also to how many fast food workers we are going to need and start funding their training because that will become the major employment opportunity of the future.

Reality Check on Gold

Still lots of excitement about gold investing, even with it at an all-time high.  Just thought a little reality check on gold vs. stock prices from the darkness of March 2009 until now would be interesting.

                                           Gold              S&P500

March 2009 (approx)         $930/oz                750
July 2011 (approx)            $1540/oz              1330

% Increase                           66%                   77%

I guess it is a matter of judgment which was the riskier investment in 2009 and which is riskier now.  At least  it isn't necessary to find someplace to stash the S&P500 if that is the choice.

Now if congress and the president can just get their act together and keep the USA a safe place to invest and do business!

Suicide by Living

I like David Brooks’ column, Death and Budgets,  in Friday’s  New York Times.  It reminded me of a discussion I had a few days ago with a neighbor about dogs, our pound rescue recently deceased after fifteen years as a member of the family and his spaniel still energetic and in the prime of life.  I told him that it had been sobering to watch our dog, in a period of about a year, go from a high level of alertness, always noisily charging the front door when the bell rang and always ready to attack any dog of any size, to being silent and unaware of her surroundings and finally almost unable to walk.  My observation was that, while she went through that process in a year or so, I will probably spend seven years on it.

I love life and am a pro-life kind of guy.  Any intentional ending of human life is repulsive to me.  But, we have to face the simple fact that physical life is terminal.  I have tried unsuccessfully to find the quote from a movie I remember from a generation or so ago.  The female lead announced that she was dying.  Someone asked, “What do you have?”  Her reply:  “A body.”

One might conclude from the Brooks Op-Ed that a large part of our federal spending problem is a result not of backward citizens clinging to guns and religion but of supposedly sophisticated and educated people clinging to physical life.  We seem to have the idea that if we spend more and more on health care, the biggest driver of the hopelessness of our budget outlook, we will live longer and longer and be happier and healthier in the end.  Of course in some cases such an approach only leads to weeks or months of hospitalization hooked to machines or years in nursing homes living from pill to pill, listening to warnings not to get up because we might fall or being belted and taken where we “do not wish to go.”

I guess clinging to or hoping for or worshiping physical immortality is a kind of religion anyway.  It’s a rerun of that scene in the Garden of Eden, the serpent saying to the woman that if she eats from the forbidden tree, “You will not certainly die…for God knows that when you eat of it your eyes will be opened, and you will be like God, knowing good and evil.”  We do have that inherent desire to live forever and be like God, quite reasonable in the spiritual sense but not a physical possibility.

Jesus said, “For whoever wants to save their life will lose it, but whoever loses their life for me will save it.”  That’s pretty deep.  But maybe it means that if we are inwardly focused, just trying to preserve our minds and bodies as long as we can, we are in trouble.  If, on the other hand, we are focused on our calling, whatever that is, we will have a fuller life and something to look forward to afterward.  So, lets take a little risk, living life on the edge as long as we can, trying to be of service to others, knowing that we might die a bit sooner and pile up fewer medical bills than if we are more cautious.  Maybe it could be called suicide by living.  Well, we can at least pray for the courage to live our lives so fully. 

And if you have a few minutes to read something thought provoking, check out this essay by Richard John Neuhaus (1936-2009). It was also linked in the Brooks column. 

On a separate but related note, I read or heard somewhere this week that today’s younger generation might be the first in America to have shorter lives on average than their parents, not because of health care system failures but because of obesity.  So, here is a suggestion for a risk-free way to increase the odds of living longer while feeling better, having more energy to pursue our vocations, saving money, and sharing with others: Eat less.  Hope I can.

Good GDP, Bad GDP

“With consumption being 70% of the economy, and a great multiplier, you need to find a way to get money in the hands of consumers. In the short term, with GDP being G+C+I, if C isn't going to spend then G has to.”  That is the quote from a Reduced Deficit = Increased Debt response which agitated me a bit and got me thinking about GDP, the holy grail of macro economics.

Exact GDP, the total value of goods and services produced within the country in a given time interval, is of course unknowable, but the quote refers to the Expenditure Method of estimating it.  The method assumes that GDP must be equal to total spending by government (G) and consumers (C) plus private investment (I) including investment in residential housing.  It is worth noting that government spending on transfer payments to citizens does not count.  Export (Ex) and imports (Im) should have been included as well so the total formula would be GDP = G+C+I+Ex-Im.  For GDP, exports help and imports hurt.

The other method of estimating GDP, the Income Method, is based on an assumption that GDP must be roughly equal to the total income of all the providers of goods and services and uses total salaries and wages, profits, rent and interest received by individuals, with some adjustments, to estimate GDP.  But I am sticking with the Expenditure Method, for this discussion.

There are some issues with GDP as an indicator of economic activity.

1. Spending on used goods is not counted.  No wonder the government wanted to destroy all those used cars taken in during the “Cash for Clunkers” fiasco.  It would not have helped GDP at all to sell them, while paying somebody to destroy them was a positive. 
2. Work done in one’s own support is not counted.  Value created by a family that raises its own food, for example, or a homeowner or vehicle owner who does his or her own maintenance is not counted.  And of course no value is assigned to taking care of one’s own children or preparing one’s own food or cleaning one’s own house.  Some creative liberals have proposed that the government should compensate us for some such activities.  That would truly be the end of freedom.
3. Spending on illegal activities such as drugs, prostitution, burglar tools, and some gambling is not counted.  Oops, I think burglar tool purchases would count if new and from a legal business.
4. Spending on correcting the problems caused by illegal drugs, prostitution, burglaries, and gambling (legal and medical fees, courtroom costs, prison costs, etc.) is counted. 
5. Wasteful spending counts exactly the same as wise and frugal spending.  No value judgments are made by the numbers so those Las Vegas junkets the president was discouraging early in his term count exactly the same as purchases of those new $20 light bulbs congress wants us to buy now.  (I’m not saying which I think is wasteful and which is wise.)
6. Corrective spending such as clean-up after floods and earthquakes and fires does count so disasters can easily boost GDP while subtracting from national wealth at the same time.
7. Cost of ignored advice from consultants counts, but the value of volunteer work does not.  That hits home with me when I consider the compensation I received during my first few months of retirement for ignored advice alongside the uncompensated value of volunteer work I have done in the ten years since. 

I just want to make a few observations and a couple of judgments, so please humor me a bit.  First is that GDP is higher than in 2007 before the recession started.  

GDP sagged a bit in 2009 but nothing like employment numbers would seem to indicate. As a football coach might say to the team, our economic success depends more on talent and attitude than on statistics, and we need to forget GDP, forget depending on the government to bail us out, get our attitudes right, and get to work doing something worthwhile for somebody.  As FDR’s Treasury Secretary, Henry Morgenthau, confessed on the eve of US entry into WWII, as the Great Depression dragged on, “Now, gentlemen, we have tried spending money. We are spending more than we have ever spent before and it does not work.”  Unfortunately, in that case, it took WWII to get our attitudes right. 

Second is that spending by either consumers or government on overpriced goods, bubble priced housing for example, may look good at the time but has no permanent value and leaves a big debt to pay in the future.

Third is that stupidity such as government spending of $2.7B on 145,000 formaldehyde contaminated trailers and mobile homes for emergency housing in the wake of Katrina, on highways and bridges to nowhere, and miscellaneous vote-getting and ego-stroking parks and monuments is destroying both the economy and the attitudes of citizens.  According to this news story, many of those FEMA trailers, which would have been a waste even without the formaldehyde, are now being sold for as little as seven cents on the dollar.  (The re-sales, of course, don’t count as GDP.)

It is unfortunate that consumer spending (C) is 70% of our economy and that so many buy the ideas expressed in the quote at the beginning of this post that spending, even if wasteful, is vitally important and that if consumers insist on conserving and saving, government must step in and borrow or print some money to spend.

Here are some value judgments I would make about GDP: 

1. Good GDP = Exports and Investments to improve competitiveness of exporters (like Boeing's SC plant)
2. Good GDP = Investments to improve productivity and output
3. Good GDP = Consumer spending on goods with reasonable lifetimes
4. Good GDP = Consumer spending on maintenance of purchased goods
5. Good GDP = Consumer spending on needed expert services
6. Good GDP = Consumer spending on services to free themselves to work and produce
7. Good GDP = Government spending on essential goods and services only it can provide

1. Bad GDP = Spending on goods and services of poor quality
2. Bad GDP = Spending on un-needed or un-used goods and services
3. Bad GDP = Government spending on non-essentials just to pump the economy
4. Bad GDP = Government spending of borrowed money
5. Bad GDP = Spending on cheap and poor-quality imports such as smelly drywall, counterfeit goods, and useless souvenirs, especially American flags made in China.

1. Good but no GDP Impact = Taking care of our families, our homes, and the stuff we buy 
2. Good but no GDP Impact = Volunteering to help those who CANNOT help themselves

Unfortunately, it seems that many of the “Good” components of GDP are decreasing as a percent of the total and many of the “Bad” components are increasing. 

If you crave details, this table, after you click on it, might help.  Or, if you prefer to look at the raw data, go to the BEA NIPA tables on which this table is based.

Reduced Deficit = Increased Debt

Yes, I think the simple fact expressed in the title equation is lost in the shuffle of the posturing under way in Washington DC.  The only way to reduce, not eliminate but just reduce the debt is to run a surplus.  Reducing the federal deficit as proposed by the most aggressive budget hawks currently on the scene will still increase the federal debt.

There are only two strategies that can lead to meaningful debt reduction:

1. Unbelievable economic expansion that would dramatically increase earnings and profits and result in much  higher tax bills.  
2. Unbelievable inflation  that would dramatically decrease the cost of paying off the debt.

Real economic expansion can never result from government stimulus spending.  It always has to result from  investment in economically sound projects that return more than the cost of capital to the investors.  Such investments are unlikely to be made until the federal government gets its spending under control and enables reasonable prediction of inflation and tax rates for the foreseeable future.  That does not require reducing the debt, but it does require balancing the budget and stopping the growth of the debt.

Inflation, on the other hand, can easily result from government stimulus spending.  I guess that is where we are headed.

It's just a little reality check.  Here are the updated trends through Q1 of 2011 of federal revenues and spending.  Click on the chart for a readable high resolution version. Then hit the back arrow to get back to this posting.

Well, I was thinking this post would just be facts and no opinions, but it is hard to keep my opinions to myself.  I am guessing that a majority in congress agree with me but lack the courage or energy to deal publicly with the situation we face.  I doubt that I could stand the pressure they are under from constituents and lobbyists always clamoring for more more more.  And of course any who do speak the truth and vote for responsible spending will lose their jobs.