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Rahm Emmanuel, IL DUCE!

Yesterday, Rush did us all the favor of playing the tape of Rahm Emmanuel's pronouncement that a crisis is a terrible thing to waste. Rush surely gets the message. He's been hammering this theme concerning the essential "character" of the Democrat party for years: they can never let you know what they're really up to, since that would make them unelectable. Or, as he put it during the Clinton years, "these people wake up every morning asking themselves, 'how can we trick 'em today'."

Well, Rahm Emmanuel was a part of that administration, and he's still asking himself that same question. He knows full well that the American people, in "normal" times, would never knowingly adopt the true agenda of today's radical Dems, who are nothing but a lot of aging '60s radicals, and younger '60s radical wannabees, selling themselves fraudulently as Harry Truman or John Kennedy. Thus it is somewhat surprising that Mr. Emmanuel is so up front about his intent to, in essence, trick America into adopting a radical socialist agenda, while it's still vulnerable, disoriented, and panicky as a result of financial turmoil. In other words, get them to fall for, while in a vulnerable state, a program of vastly expanding central government power at massive cost to the nation's working men and women, which they would never approve while thinking rationally. When he admits that the financial crisis is, for him, an opportunity in just this sense, what other conclusion can we draw?

Friends, if this isn't the very definition of fascism I don't know what is. It is a subversion of democracy to foment panic in the hope that disoriented voters will approve their own undoing. Moreover, it makes me harbor serious doubt as to whether this crowd is anxious at all for the panic to abate and an economic recovery to ensue. As I alluded to previously, Barry O has options available to him which would do a much better job of restoring confidence than the dog-and-pony shows surrounding the Detroit automakers, or nominating as Treasury Secretary one of the same crowd that has been leading the charge for ever greater central government intervention (I say yesterday's stock market rally was much more about options expirations, and perhaps some small sense of relief, than a vote of confidence in Mr. Geithner).

For starters, he could simply pledge no new taxes - the understanding since 11/06 that the Bush tax cuts would almost
certainly expire has been ruinous to confidence. Another great step would be to scrap CAFE standards. Unfortunately, we know that will never happen, thus the sense that we are governed by nothing but free-spending clowns grows ever greater. The failure of the incoming administration to address our nation's problems seriously, rather than pandering to ancient interest groups and bowing to nonsensical political dogma, leads me to a sad conclusion: this crowd is much less interested in solving problems than in exploiting them. As FDR said, this isn't about a recovery, "this is politics." Please, dear readers, don't forget this.
 
 
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Quote of the Day

"General Motors does not make cars. General Motors makes money."
Alfred P. Sloan, President and Chairman, General Motors, 1923-1956.
 
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Today's History Lesson

"It's (Japanese Supreme Council) final plan for the defense of Japan itself, 'Operation Decision', provided for the use of 10,000 suicide planes... 2,350,000 trained troops would fight on the beaches, backed by 4 million army and navy civil employees and a civilian militia of 28 million. Their weapons were to include muzzle-loaders, bamboo spears, and bows and arrows...
 
American intelligence quickly became aware of this fight-to-the-finish strategy, and American commanders were under no illusions, in the light of their experience in conquering the mid-Pacific islands, what it would mean in terms of casualties... By this stage in the war, the Americans had suffered 280,677 combat deaths in Europe and 41,322 in the Pacific, plus 115,187 service deaths from non-hostile causes, and 971,801 non-fatal casualties. In addition, 10,650 US servicemen had died while prisoners of war of the Japanese (out of a total of 25,600). The Allied commanders calculated that, if an invasion of Japan became necessary, they must expect up to a million further casualties. Japanese losses, assuming comparable ratios to those already experienced, would be in the range of 10 million to 20 million." Paul Johnson, "A History of the American People".
 
According to the Washington Post, as of November 14, 2008, U.S. casualties in Iraq total 4196 KIA, and 30,793 non-fatal casualties.
 
 
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Scary, Scary Charts

Louise Yamada, renowned technical analyst and winner of multiple Institutional Investor awards, appeared on CNBC this afternoon. She put up a chart of the S&P 500 from 1980 to present. Friends, this was the most frightening chart or graph I think I've ever seen. We've broken support on the right side of a massive double top, on the way down to the long, long-term trend line. Can you say Dow 6000?
 
This reminded me of something I've thought of quite a bit recently. In 1996, I heard a presentation by one Alan Shaw, since retired, who at the time was Chief Technical Analyst at one of the big counting houses. He put a chart of the Nikkei over a chart of the S&P, and it was chilling. It was the same chart, only we were 12 or so years behind. He then launched into a discussion of demographics, specifically noting that our demo trends trailed Japan's by, oh, about 12 years or so. He concluded this segment of his talk by saying: "Hey, I don't have a crystal ball. I don't claim to have all the answers. But we've got to ask ourselves some questions here, don't we?"
 
Are we looking at a multi-year walk in the wilderness similar to what Japan has endured? Is there any way we could avoid it? I hate to be a broken record, but the one thing we can't do is repeat the mistakes of the past, and throw good money after bad. If we've got to reflate massively and then take our chances, that's fine, but there are right ways to do that, and there are wrong ways. Pandering to a decrepit labor union and its ossified political machinery does not exactly inspire.
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My Friends, It's Over

I'm not referring specifically to the stock market action of today (although that is depressing enough). I'm referring to the thesis of the estimable and ever-youthful (this guy must be a relative of Dick Clark) Arthur Laffer. His new book is entitled "The End of Prosperity". I have just obtained a copy of same, and will review it here in the near future. However, Dr. Laffer outlined his thesis in a recent opinion piece in the WSJ.
 
Importantly, Dr. Laffer begins his WSJ piece ("The Age of Prosperity is Over") by restating a most fundamental, but too often ignored point: "Financial panics, if left alone, rarely cause much damage to the real economy, output, employment, or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent." Translation: a free and unfettered marketplace will, even in troubled times, brilliantly redirect capital away from inefficient holders and uses, toward newer and more efficient uses and processes. Thus, recessions actually accomplish a salutary function: they prune deadwood from the economic tree, and separate fools from their money. This is the process by which a dynamic modern economy sets the stage for the deployment of new technologies, thus creating every-higher living standards.
 
If you can't quite buy this, ask yourself whether it makes sense to loan money to borrowers with a history of non-repayment; or to prop up dying industries endlessly, a la pre-Thatcher Britain, or Detroit (whatever happened to British Steel, British automakers, British motorcycles, etc.?). If you need a case study in throwing good money after bad, study what's happened to Detroit over the last 40 years. As Dr. Laffer put it: "Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it."
 
What does this mean for prosperity? "The government doesn't create anything: it just redistributes. Whenever the government bails someone out of trouble, they always put someone else in trouble, plus of course a toll for the troll (Washington)." Thus, if you like the way Washington runs the Post Office, Fannie Mae, Freddie Mac, etc., you're gonna love what they do for Wall Street and Detroit. I ask you, dear readers, what will this do for the recovery?
 
 
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The Obama Benchmarks

Hugh Hewitt posted a piece yesterday setting forth the economic benchmarks by which the Obama administration should be judged. Specifically, Hugh lays out various economic statistics as of November 5, 2008, and suggests that in the fall of 2012, the state of these stats should be the basis on which the incoming administration - at least as to economic policy - should be judged.
 
At first blush, I felt this was unfair and unrealistic. After all, as of today, in fact until two months from today, Barry O possesses ZERO executive authority. We only have one President at a time, don't ya know. Moreover, drawing accurate conclusions concerning the effects of any President's economic policies is a tricky enough business, due to time lags and myriad external factors, both foreseeable and not, without further muddying the waters with arbitrary judgment days.
 
I've changed my mind. There is much the Obamalama could be doing now to calm our extremely nervous markets, but isn't. In view of his seedy, far-left background, all the talk on Capitol Hill of a new New Deal, and Rahm Emmanuel's reference to the financial crisis as an opportunity (to "fundamentally change the country"?), I think it's fair to assume, until proven otherwise, that the magical O is not at all disturbed by financial chaos and a deteriorating general economy.  Further, I think the markets know this, just as well as they know that our Congress is controlled by a clamorous claque of clowns. This is politics.
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Disastrous Day

That is how Peter Costa, NYSE floor trader and CNBC commentator, sugar-coated todays session on Wall Street. As for my call last week that we'd hit a tradeable low, "never mind". I did say be careful. Now for the blame game. A week of that circus surrounding the UAW bailout cannot support the market. Folks, we're in trouble.
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Today's Economics Lesson

Today's economics lesson addresses a tax policy phenomenon known as Hauser's Law. Hauser's Law is named for San Francisco-based investment manager Kurt Hauser, whose research into tax policy uncovered a very weak correlation between changes in income tax rates, and changes in income tax revenues as a percentage of GDP. In other words, even if you raise income tax rates substantially, it would be a mistake to expect income tax revenues, as a percentage of GDP, to increase meaningfully, if at all. Conversely, by lowering income tax rates, one should not expect that income tax revenues, as a percentage of GDP, would decline.
 
What's our takeaway here, you ask? Achieving the goal of increasing income tax revenues is, for all practical purposes, a function of increasing GDP, not increasing tax rates. Thus, in order to fatten government coffers to achieve fiscal goals such as deficit reduction, or building out a "social safety net", the solution is growing GDP, not raising tax rates. How do you grow GDP? Incentives. Provide incentives for the hardworking, innovative, and frugal to direct their considerable energies (and capital) toward economic best uses.
 
So ask yourself, does a particular policy provide such incentives? Does it unleash "animal spirits", or cage them? What do you think would be the effect on GDP growth of increasing taxes on income (aka, work), or throwing billions at Detroit? Hauser's Law, I think, explains it all. 
 
 
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Crisis, or Opportunity?

What was it that Rahm Emmanuel recently said? A crisis is a terrible thing to waste?
 
Way, way back in September, weeks before the election, weeks even before I started this blog, I asked myself the following question: Given that most of the Democrat-installed crap had been stripped out of the $700B TARP legislation, why were the Dems nevertheless so much more enthusiastic about the bill than Republicans? 
 
Answer: the big government boosters in Washington see, as the Chinese might, an "opportunity" in the financial "crisis". In the words of Vermont Socialist (his choice of labels, not mine) Bernie Sanders, "this can bring about a turn toward a new era. If we have the money to bail out Wall Street, we can provide funding for health care, childhood poverty infrastructure and sustainable energy."
 
I guess you can add to that list, the UAW, and probably a great grocery list of infrastructure (union boondoggle) projects. Anything else? Regardless of how long the list grows, the essential point is this: massive amounts of capital of the most scarce kind (the kind that requires the Treasury Dept. to print money) is going to be diverted to some really inefficient uses. This is no prescription for economic growth, and certainly not for any kind of bull market.
 
All of this begs another question, however. Does anyone in charge in Washington really care about economic growth? I'm reminded of a famous Great Depression/New Deal anecdote. Secretary Morgenthau featured a sign on his desk which asked "does it contribute to the recovery?" Upon seeing this, FDR chided him. The issue wasn't recovery, he said, "this is politics." For the feline Roosevelt, the Great Depression wasn't a crisis, it was an opportunity. As described by former WSJ editor Robert Bartley, it was, more specifically, an opportunity to replace one aristocracy with another. An opportunity to replace business as the dominant force in American life, with bureaucrats and politicians - a permanent political class in Washington.
 
I'm afraid that like FDR, Rahm Emmanuel - and one must assume Barry O - isn't interested in economic growth nearly as much as politics. Specifically, entrenching in Washington an even more permenant political class made up of an aristocracy of people who had a talent for taking tests as teenagers, and for little else, yet nevertheless believe themselves expert in everything and subordinate to no one outside their tribe. These twerps need people to need them, and a Reaganesque America in which opportunity abounds for anyone with talent and ambition - regardless of their SAT scores - is therefore anathema.
 
Rush was once fond of lecturing that the difference between us and them is that they measure policy and political success by how many people are getting government aid; while we'd measure success by how many people don't need government. It has been characteristic of the Left since the New Deal to claim, a la Professor Higgins, that we NEED them. And to prove it, they're going to kill the private economy. I hope this doesn't end the same way the Great Depression did.   
  
 
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Investment Thought of the Day

In the November 17 issue of Forbes ("The Coming Shakedown"), Bill Baldwin spells it all out. The Treasury is going to be very, very hungry. From the standpoint of a greedy, avaricious uber-state, it only "makes sense to go after those citizens who are hardworking and frugal. You can't pick an empty pocket." In short, there is going to be an attack on savings. The concept of growing our way out of the hole we're in is "no longer operative". In fact, it hasn't been since November, 2006. 

What does this mean? Per Mr. Baldwin, "municipal bond coupons... will be taxed.... Retirement accounts will be looted." Most ominously, there is always inflation. What better way for debtors (U.S. government, underwater homeowners) to escape ruin than to pay creditors with inflated dollars. Conclusion: it's going to be bad to be a creditor. Or, as Mr. Baldwin concludes, "it's a bad bet to buy long dated bonds." Real estate, or even stocks, will be better. Gold anyone? 
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Kill GM, Save Michigan

That was the title of a piece by John Tamney in IBD last week. It made so much sense, I had to ask myself, "would Barry O pursue such a course?" Nah. I say there's no way he let's GM go down on his watch. Letting GM die would represent such a triumph of both courage and good sense, it would be positively Reaganesque. I'm given to understand, however, that Obama is no admirer of Ronaldus Magnus. Thus I'm watching out-of-the-money calls on GM. I wouldn't touch the common. I'd go for the leverage play in a situation like this in which one little bit of good news could double the share price. Understanding, of course, that with leverage lies risk. But it doesn't hurt that gas prices are cratering.
 
If GM were allowed to die, maybe we'd buy a condo in East Lansing near my in-laws. Such an event would surely mark the rock bottom of the dirt-cheap Michigan real estate market. Because, as John Tamney pointed out, GM's assets would be bought up "by competent foreign automakers eager to expand their capacity in ... the world's largest auto market." Just imagine what Toyota, Honda, or Nissan might do: (a) with a wealth of assets bought on the cheap, and (b) without the UAW!
 
But alas, we are going to be stuck with a giant, capital-sucking sink hole, propped up for the benefit of union thugs, at the (crushing) expense of the rest of the country. I had been at least a bit sympathetic to the idea that propping up the Detroit Three was probably the best of several bad choices, due to the likely negative multiplier effects on the general economy, emanating especially from the suppliers. But I got to thinking: if the assembly capacity was bought up by competent operators, wouldn't it make more sense to use any bail out money to keep competent suppliers afloat should their cash flow positions deteriorate to near-death status in the interim? Would that not be the more efficient allocation of scarce capital?
 
For me, all of this mess really highlights one inescapable conclusion. Big chunks of the American economy are likely to start looking more and more like pre-Thatcher Britain. When reasonable alternatives are shunted aside in favor of throwing gargantuan sums toward, as Michael Barone put it, "preserving in amber" decaying slices of an outmoded and uncompetitive America, for the benefit of no one save powerful interest groups, I have to wonder how long it's going to be before the U.S. is called the "sick man" of something.
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Quotes of the Day

"It is a mistake to look too far ahead. Only one link in the chain of destiny can be handled at a time."
 Winston Churchill
 
"In the long run, we are all dead."
John Maynard Keynes
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Today's History Lesson

"...the Jacksonians proclaimed that 'the world is governed too much'."
 
"The single most important heritage from the revolutionary age was freedom. Individual liberty. That was an American's most prized possession. That is what had to be preserved. That is what was at stake in the 1820s and what had been jeopardized by the corruption of the government following the War of 1812, and that was the essence of Jackson's political leadership of this country after he concluded his military career. There really was no other issue. Everything else - banking, internal improvements, tariffs, even slavery in a strange and peculiar way - was secondary. Individual liberty. That was the basic question."
 
"From colonial days through the Revolution and well into the nineteenth century, Americans believed that those who exercised power were naturally inclined to suppress liberty and that they regularly devised means to limit if not abrogate the rights of the people. They viewed corruption as power's greatest weapon and virtue as freedom's greatest defense. The struggle between liberty and power produced the Revolution... But the dangers to freedom persisted. They persisted as long as power could be concentrated and the operation of government corrupted. The only defense rested upon the virtue of the American people."
 
Robert Remini, "Andrew Jackson, The Course of American Freedom, 1822-1832"
 
 
 
 
 
 
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Hillary Secretary of State?

Jeff Macke just said pish-posh. She's going to the Supremes. That's right, it's going to be Madame Justice Hillary Rodham.
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Investment Thought of the Day

The excellent Fast Money had a feature today noting that this week has seen quite a spate of insider buying among top corporate executives. By itself? Interesting, but not intriguing, I once heard a judge remark.
 
What makes this intriguing, and not merely interesting, is that this comes at the same time as we also witnessed (a) a key reversal in the major averages (Thursday), and (b) epoch-defining hedge fund redemptions. Thus, rather than simply conclude that certain execs got new credit lines, or were instructed by lawyers to make votes of confidence with their checkbooks, this confluence of events suggests a significant tradeable "bottom".
 
I am not sanguine on the medium to long-term prospects for either the stock market or the U.S. economy. Certainly, I'm not encouraged about the short-term prospects for the general economy, either. However, please note that I said "tradeable". Even the worst bear markets have rallies. But be very, very careful out there.
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